Monetary Policy: The Inflation-Targeting Strategy in Colombia

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Monetary policy in Colombia is governed by an Inflation Targeting strategy, thats purpose is to maintain a low and stable inflation rate and to reach output growth in line with the potential capacity of the economy. This means that the objectives of monetary policy combine price stability with maximum sustainable growth of output and employment. These objectives are compatible as long as the inflation targets are credible. Thus, monetary policy complies with the Constitutional mandate and contributes to improve the well-being of the population.

 Document "Monetary, exchange and credit policy decision-making process." (only available in Spanish)


Horizon and Implementation

The Board of Directors of Banco de la República (BDBR) determines the monetary policy with the purpose of maintaining the inflation rate around its long-term 3.0% target (within an admissible +/- 1.0%). This target is set according to consumer price inflation, which is measured statistically as the annual variation in the Consumer Price Index (CPI). 


Source: Inflation Target, Board of Directors of Banco de la República. Headline Consumer Inflation, DANE. Note: Headline or total consumer inflation refers to the 12-month national total CPI weighted variation produced by DANE. 

Decision-Making Process

Monetary policy decisions are made based on the analysis of the current situation and prospects of the economy, and according to the evaluation of the inflation forecast versus the target. Should this assessment conclude that risks exist for inflation to deviate from the target in the policy horizon, and that such deviation is not due to transitory shocks, the monetary authority will proceed to modify the policy, adjusting its main instrument, i.e., the benchmark interest rate for intervention in the money market (Banco de la República’s short-term liquidity interest rates).

Thus, monetary policy contributes to ensure price stability and to maintain a high and sustained economic growth that generates employment and improves the standard of living of the population. If the economy exceeds the pace for sustainable growth, there could be spending excesses which could compromise the stability of prices or lead to financial fragility, which could end up causing strong falls in production and employment.