Colombia's central bank must anticipate 2027 risks with rate adjustments, co-director says

Colombia's central ​bank needs to tighten monetary policy early to ​meet its inflation target in 2028 ‌because many ​inflation risks will probably materialize in 2027, said central bank co-director Mauricio Villamizar.

Villamizar, one of the seven members of the monetary authority's board, ‌told Reuters that raising rates once those risks materialize would be more painful than now, and acknowledged the bank could have tightened more forcefully in recent months. The bank held its benchmark rate at 12.25% in late ‌October, with four of seven board members in favor and three backing a 25-basis-point hike.

Villamizar expressed concern ‌about the slow pace of the downward trend in inflation, which stood at 6.30% at end-October, more than double the bank's 3% long-term target. Effects from the El Niño phenomenon, Colombia's fiscal situation and external factors, including geopolitical risks, commodities and oil prices, ⁠are ​three major factors that ⁠pose upside risks to inflation, Villamizar said in an interview on Wednesday afternoon.

Additionally, the co-director warned that a potential 2027 minimum wage ⁠rise above 9%, or Congress defeating or cutting the government's fiscal reform, would warrant a large new monetary policy response. Colombia ​has failed to meet its inflation target since 2020, and both the central bank's technical ⁠team, the government, and the market project that it will also fail to meet it for the seventh year in 2027, ⁠only ​returning to the target in 2028.

"To meet the 2028 target, we need to take action now because monetary policy has a significant lag," said Villamizar, adding that the central bank could have ⁠acted more aggressively in previous months. "At the moment it is less costly to accumulate a contractive posture, but ⁠later on it will ⁠be more costly," he added.

The bank raised rates by 100 basis points in both January and March, 75 bp in June and 25 bp ‌in September, for ‌a total of 300 basis points.