Monetary Policy


The purpose of the monetary policy

 

The primary objective of monetary policy is to reach and maintain a low and stable inflation rate, and to achieve a long-term GDP growth trend.

 

This is the only way to achieve sustained growth rates that will generate employment and improve the population’s quality of life. Otherwise, if the economy does not grow on a sustained basis, sooner or later a crisis will occur with serious consequences for the economy, leading to worsening social indicators, loss of public confidence, lowered investment and higher unemployment.

 
How does monetary policy affect the economy?

 

When the Banco de la República alters its intervention rates, it affects the market’s interest rates, the exchange rate and the cost of credit, thereby activating mechanisms that affect the following:

 

  • Financial markets.
  • Decisions by economic agents on expenditure, production and employment.
  • Expectations of economic agents, based on of policy announcements.
  • The inflation rate, after a long and variable period of time.

 

How is monetary policy implemented in Colombia?

 

The Board of Directors of the Banco de la República, Colombia’s Central Bank, defines the quantitative inflation targets. The latter are defined as the yearly variation of the Consumer Price Index (CPI) given by the DANE (Departamento Administrativo Nacional de Estadística – The National Department for Statistics).

 

What are the current inflation targets?

 

Why is it essential to have a low and stable inflation rate?

 

A low and stable inflation rate improves the well being of the population. This is manifested in various ways:

 

Monetary policy in an uncertain environment

 

Monetary policy should continuously assess the state of the economy, as well as its future developments and prospects over the next four to eight quarterly terms. It is during this time span that changes in interest-rate intervention rates have their effect on other interest rates and have impact on the economy. Therefore, monetary policy necessarily operates in an environment of uncertainty. The following factors contribute to this:

 

This content has been translated into English for informational purposes. Upon any query regarding its interpretation or enforceability, the Spanish version shall be deemed official, and will prevail over the English version. The authors of specific texts such as working papers or articles select the language of publication; therefore, there might be cases in which the content may only be available in English. Este contenido ha sido traducido al inglés con fines informativos. En caso de duda sobre su interpretación y/o aplicación, se entenderá que la versión en español es la versión oficial y prevalecerá sobre aquella en inglés. Para casos particulares como documentos de trabajo o artículos, el idioma original de publicación es escogido por el autor, por lo cual puede haber casos en los que el contenido esté disponible sólo en inglés.