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.
Does the Bank adjust the policy interest rate in the same way in response to every price increase?
No. The Bank does not respond in the same way to every price increase. When demand fluctuations drive price changes, the Bank can offset them by changing the policy interest rate. When price changes result from supply fluctuations, the response depends on the circumstances. If supply-driven increases are temporary and prices are expected to stabilize on their own, the Bank does not intervene. However, if the effects are more persistent, the Bank assesses the situation and may decide to adjust the policy interest rate.
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...
