Central Bank hikes more than expected in January

Bank hikes for first time in almost three years: At its meeting on 30 January, the Central Bank of Colombia (Banrep) decided by a majority vote to increase its policy interest rate by 100 basis points to 10.25%, marking the first hike in nearly three years. The move surprised markets, which had penciled in a milder hike of 50 basis points. The board of directors was split: Four voted in favor of the 100 basis points hike, two supported a 50 basis point reduction, and one backed holding the rate unchanged.

Worsened inflation expectations trigger the hike: The Central Bank's decision was primarily driven by a deteriorating 2026 inflation outlook due to the sizable 23% minimum wage increase from January 2026 introduced by the government. Additionally, the Bank highlighted that economic growth remained solid in 2025 and that the current account deficit continued to deteriorate, suggesting a hot economy that could further exacerbate inflationary pressures, pushing Banrep to hike rates in turn.

Additional increases in the pipeline: The Central Bank provided no explicit forward guidance on the future direction of interest rates. That said, our panelists perceive the larger-than-expected increase in interest rates as signaling the start of a tightening cycle. As such, the vast majority of our panelists expect interest rates to increase from current levels by the end of 2026.

Panelist insight: Commenting on the outlook, analysts at BBVA stated: “We believe that this above-expectations rate increase also reflects a pre-emptive strategy to get ahead of price formation and anchor expectations, thereby avoiding the need to reach a higher terminal rate later in the cycle. As such, we estimate that the cumulative adjustment (including the decision already implemented) could reach 300 bp and would likely occur at a relatively rapid pace.” Santiago Tellez, analyst at Goldman Sachs, added: “Such a move does not suffice—and further hikes are in the pipeline—considering other upside risks to inflation, including an economy that maintains its dynamism, a positive and widening output gap, and the existing macro imbalances (external; fiscal) that were exacerbated by the large wage surprise.”

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