As for the monetary policy instruments available to achieve the inflation target, Banco de la República performs auctions of REPO operations to provide liquidity to the banking system by granting one-day loans (sometimes at longer maturities) so that the one-day Reference Banking Indicator (IBR) be close to the policy interest rate set by the Board of Directors. Banks support these loans with government bonds (mainly TES), with repurchase agreements according to the terms agreed. In some cases, when the economy presents an excess in the market of primary liquidity, the Central Bank uses the auctions of Remunerated Deposits not Constitutive of Reserves (DRNCE) to drain these excesses. In both cases, the policy interest rate set by the Board serves as a reference for these operations.
The Board of Directors meets eight times a year to make monetary policy decisions: January, March, April, July, September, October and December. In preparation for these meetings, the technical staff of the Office for Monetary Policy and Economic Information meets with the Board to discuss the current situation of the economy and the macroeconomic forecasts of the technical staff. The technical staff presents a summary of the information delivered to the Board of Directors in the Inflation Report to the public.
Whenever the Central Bank modifies the benchmark interest rate, it sets in motion a series of forces that, with some lag, affect market interest rates at different periods of time, as well as the exchange rate and inflation expectations. These variables in turn influence:
The process by which monetary policy decisions affect the various economic variables is known as transmission mechanism, which should ultimately lead to results in growth and inflation. The Bank assesses the effect of monetary policy on the economy through various transmission mechanisms and is alert to introduce necessary changes in its policy so as to achieve the targets proposed.
These are two general examples of how the transmission mechanism operates:
When projected inflation is below the target range:
When projected inflation is above the target range:
A low and stable inflation improves the well-being of the population. This takes place in several ways: