It means that people and businesses trust the Bank to adjust the policy interest rate when inflation changes may prove persistent, with the intent of keeping inflation low and stable. This credibility helps prevent short-term price fluctuations from becoming persistent inflation.
Why is Banco de la República’s credibility important for controlling inflation?
When people trust that the Bank will act to maintain inflation low and stable, their inflation expectations less and remain close to the target. This makes inflation easier to control and reduces the policy interest rate adjustments needed to reach the target.
Related BanRep Blog: Monetary policy and the Credibility of Banco de la República
The Colombian Constitution and law establish that Banco de la República’s (the Central Bank of Colombia) primary mission is to preserve the purchasing power of the national currency, consistent with overall economic policy. The purchasing power of the Colombian peso depends on the prices of goods and services traded in the economy, which in turn are determined by the interaction of supply and demand...
