Colombia adopted an inflation targeting regime in 1999,
a strategy which has proved to be very successful. Exchange
rate flexibility has allowed a better adjustment of the economy
in the presence of relatively (when compared to other Latin
American countries) large external and internal supply shocks.
Between 2014 and 2016 the economy simultaneously faced the drop
in oil prices, the climate effect of a severe El Niño
and a truckers' strike. Exchange rate flexibility has allowed
monetary policy to focus on maintaining a low and stable
inflation, and on short-term output stabilisation.
Increased credibility in the Central Bank's policies has
kept inflation expectations relatively close to the target, but
the size and persistence of these shocks threatened to
de-anchor inflation expectations and obliged the Board of the
Central Bank to initiate a cycle of increases in the policy
rates. Once inflation began to recede and economic growth
slowed down, the Board decreased rates from
7.75% in December 2016 to 4.25% at its meeting last April.
Monetary stance is relatively loose today.
External and internal conditions look much more favourable
in 2018; inflation is close to the target of 3.0% and growth is
accelerating. International oil prices have increased markedly
in recent months and advanced economies are finally growing.
This new favourable international environment has played a part
in the better performance of non-traditional exports and
On the domestic front, the reduction of interest rates has
stimulated consumer demand and large investment in civil works
will continue to contribute significantly to growth. We expect
economic activity will improve and converge
towards Colombia´s potential growth of
3.5% in 2019.
Risks are high and have probably increased in recent months.
Monetary, fiscal and trade policy in advanced economies
(particularly in the US) could have an unfavourable impact on
Colombian growth. The volatility of financial markets can
increase if interest rate rises in the US are
larger than anticipated. A depreciation of the
Colombian peso could affect domestic prices, moving inflation
far from our target.
Future monetary policy decisions will depend strongly on
inflation and growth expectations. The economy is still growing
below potential, and inflation expectations are above the
target (i.e. between 3.3 and 3.5%). The financial sector in
Colombia looks strong and healthy, though bad debts have
increased and there are important financial investments in some
Central American countries like Panama, El Salvador and Costa
Rica. Those countries import oil and are also subject to
potential US financial shocks. We constantly monitor the
behaviour of the financial sector (together with the other
governmental authorities responsible for its regulation). Other
policy challenges remain. There is always space to improve
communication and transparency in monetary policy