It means that people and businesses trust the Bank to adjust the policy interest rate when inflation changes may prove persistent, with the intent of keeping inflation low and stable. This credibility helps prevent short-term price fluctuations from becoming persistent inflation.
How can we tell whether people and businesses trust Banco de la Repúlica?
One way is to monitor their inflation expectations. Among other measures, Banco de la Repúlica does this by surveying businesspeople and analysts. If expectations remain close to the target, or if they respond to price changes but subsequently converge toward the target, this suggests that people trust the Bank to act sufficiently to keep inflation low and stable.
Related BanRep Blog: Monetary policy and the Credibility of Banco de la República
The Colombian Constitution and law establish that Banco de la República’s (the Central Bank of Colombia) primary mission is to preserve the purchasing power of the national currency, consistent with overall economic policy. The purchasing power of the Colombian peso depends on the prices of goods and services traded in the economy, which in turn are determined by the interaction of supply and demand...
