It is the general framework under which monetary policy operates in Colombia. Banco de la República makes interest rate decisions with the intent of bringing inflation to the target and contributing to maintaining economic activity (the economy’s output) close to its potential level (the level of production when the economy operates at full capacity).
What is the objective of maintaining economic activity (the economy’s output) around its potential level?
When inflation is close to the target and demand is expected to exceed potential output, in turn generating upward price pressures, Banco de la República anticipates the situation by increasing the interest rate to avoid the economy’s overheating, circumvent most inflationary pressures, and stabilize GDP growth in a manner proportionate to its potential. On the other hand, when an expected contraction in demand is foreseen, and the output level falls below its potential, Banco de la República preemptively reduces the interest rate.
Related Blog BanRep: The Target Inflation Framework
Recent installments of this Blog introduced crucial elements of monetary policy, such as the inflation target and the monetary policy interest rate. These elements are the building blocks of what is known as the target inflation framework —the general structure under which monetary policy operates in Colombia...
