Monetary Policy Report, April 2024

Inflation continues to decline but remains well above 3%. It is anticipated to decrease significantly in 2024 and draw closer to the established target in the first half of 2025. The ongoing moderation in the economy's price levels is evidenced by the decline in headline inflation from 11% to 9.3% between September and December 2023. A noteworthy contributor to the decrease in inflation has been the reduction of food prices adjustments throughout 2023, complemented by favorable trends in the price of goods. The decrease in inflation has, however, been constrained by the behavior of the price of services, which continue to exhibit high consumption levels, acerbated by the indexation of prices to recent elevated inflation rates. Additionally, necessary adjustments in fuel prices have curbed the inflation’s decline. Going forward, the outlook is for inflation to continue its downward trajectory, converging toward the 3% target by the first half of 2025. Factors supporting the prospect of a gradual inflation reduction include the absence of significant appreciations in the exchange rate, together with lower external inflation, reduced pressure on spending over prices due to the economic deceleration, and the cumulative impact of Banco de la República’s monetary policy measures. However, persistent risks remain that could slow down the anticipated fall in inflation, such as an unforeseen increase in the exchange rate or heightened impacts of the El Niño (ENSO) phenomenon on food and energy prices. The decrease in inflation would occur against a backdrop of slow economic growth for 2024 and a recovery thereof in 2025. Towards the close of 2023, economic activity persisted in its deceleration, reflecting the low levels of investment and, to a lesser extent, a moderation in consumption. The unemployment rate, while still relatively low, has witnessed a recent uptick in the past months. The economy is poised to sustain modest growth rates for 2024, further consolidating the ongoing convergence of inflation toward the established target. An acceleration in economic activity should begin in the latter half of 2024, attaining sustainable levels in 2025 in line with the economy's productive capacity. The monetary policy stance has contributed towards mitigating inflation and addressing broader macroeconomic imbalances within the country. Notably, inflation rates and associated expectations have declined, albeit persisting above the 3% target, concurrent with an overall deceleration of economic activity. Against this backdrop, the Board of Directors of Banco de la República adjusted its monetary policy interest rate, lowering it from 13.25% to 12.75%. The monetary policy decisions enacted by Banco de la República have contributed to rectifying prevailing macroeconomic imbalances accumulated in recent years, including elevated inflation, excessive spending and credit levels, and a pronounced external deficit. Consequently, the macroeconomic landscape has undergone requisite adjustments characterized by: A realignment of economic activity towards levels more consistent with the economy’s productive capacity. Attainment of a more sustainable balance in foreign transactions. A reduction in both inflation rates and associated expectations. Considering these outcomes and amid diminishing inflationary pressures and subdued economic growth, the Board of Directors of Banco de la República opted to decrease the monetary policy interest rate by 25 basis points during its meetings of December 2023 and January 2024, bringing it down to 12.75%. This interest rate adjustment acknowledges the reduction in inflation and its associated expectations, in alignment with the overarching goal of steering inflation towards the 3% target by mid-2025 while fostering sustained economic growth over time. Box 1 - Regional Economic Pulse: High-Frequency, Short-Lag Indicators to Understand Local Economies Autor: Dora Alicia Mora Pérez, Diana María Cortázar Gómez, Carolina Ramírez Rodríguez and Antonio José Orozco Gallo

During the second quarter of 2025 (2025),global financial markets operated in a context of high uncertainty, driven by trade tensions, fiscal concerns, and geopolitical risks. However, economic activity showed signs of resilience, and markets recorded partial recovery. International financial conditions remained relatively favorable, despite episodes of volatility. In Colombia, inflation continued to decline, although it remained above the target set by Banco de la República (the Central Bank of Colombia, Banrep), which maintained a prudent monetary policy stance in response to a slower decline in inflation, increased external uncertainty, and domestic fiscal challenges. The international environment remained characterized by high uncertainty, although with signs of economic resilience. - Global financial markets began the second quarter of 2025 (2Q25) amid trade tensions driven by new policy announcements by the United States. However, progress in trade negotiations allowed for subsequent partial recovery. - Fiscal uncertainty in the US intensified, especially amid the legislative debate over a new fiscal package approved on July 4. - Geopolitical tensions in the Middle East increased, causing increased volatility in the markets. - Despite these factors of uncertainty, global economy maintained the resilience it has shown in recent years. Inflation remained above the targets set by central banks in most developed economies, leading them to adopt cautious policy stances. In Latin America, inflation and monetary policy conditions were heterogeneous. - In the Euro Zone, inflation returned to the 2.0% target, while in other economies it remained above the target set by central banks. - Central banks maintained a cautious stance, although some cut their interest rates due to specific domestic conditions. - Interest rate expectations were revised upward following the anticipated cuts after the trade-related news in April. - Inflation remained above target in most countries in the region. In Colombia, it continued to decline but remained above Banrep’s target. - Monetary policy decisions in the region were mixed. Banrep cut its rate in April and kept it unchanged in June, amid a moderate reduction in inflation, increased external uncertainty, and domestic fiscal challenges. - Although further cuts in Colombia’s monetary policy rate continue to be anticipated, these are expected to be more moderate than projected at the end of the previous quarter. Debt markets reflected heterogeneous dynamics in both advanced and emerging economies. US Treasury bonds depreciated at the long end of the curve, reaching their highest yields since 2023. In contrast, other developed economies saw gains across their curves. - In Latin America, most sovereign securities appreciated, while in Colombia, TES (bonds issued by the Colombian Government) continued to depreciate, reflecting persistent fiscal risk in a scenario of lower liquidity and higher volatility. - At the end of June, Moody's and SyP downgraded Colombia's local currency credit rating, causing TES to lose their investment grade. - Foreign investors were net buyers of TES in the spot market during the quarter. However, following the loss of investment grade, they made significant sales in June and early July. Regarding the foreign exchange market, the Colombian peso appreciated in a context of global dollar weakness. - The US dollar weakened amid fiscal and trade uncertainty in the United States, as well as moderation in the country’s economic growth expectations. - Latin American currencies appreciated, although with high volatility due to sensitivity to trade-related news. - The Colombian peso (COP) appreciated, but to a lesser extent than its regional peers, due to local fiscal concerns. Commodity prices showed a mixed performance, driven by geopolitical and trade-related factors, while stock markets continued to perform favorably. - Oil prices declined due to increased production by the OPEC+ (Organization of Petroleum Exporting Countries and its allies) and expectations of lower global demand. - Precious metals such as gold and silver reached all-time highs due to demand for safe-haven assets, while industrial metals and agricultural commodities fell, reflecting the manufacturing slowdown and trade tensions. - Stock markets in developed countries rose following declines in April, with recovery supported by easing trade tensions and solid corporate results. - In Latin America, stock indexes extended the positive momentum observed in the first quarter of the year. In Colombia, the MSCI Colcap also maintained its upward trend, although with a lower trading volume.

The study empirically investigated the monetary theory of inflation using Nigerian data from 1980 to 2022. Annual data on the inflation rate, monetary policy rate, exchange rate, interest rate, and money supply were sourced from the Central Bank of Nigeria (CBN), the Nigeria Bureau of Statistics (NBS) and the World Development Indicators (WDI). The study regressed inflation rate as the dependent variable on the monetary policy rate, exchange rate, interest rate and money supply as the independent variables using the Autoregressive Distributed Lag (ARDL) model. The findings revealed that monetary policy rate, exchange rate, interest rate and money supply (Monetary Policy) were not statistically significant in influencing inflation in Nigeria. The study found that the first inflation lag was statistically significant at the one per cent level. The finding implies that inflation expectations cause inflation in Nigeria. The study recommends that the Nigerian government should formulate and implement other economic policies along with the monetary policy to control prices to reduce inflation in Nigeria

This paper analyses the accuracy of professional forecasts of monetary policy interest rate decisions in South Africa since 2008. This is achieved by examining the dissimilarity between the professional forecasts of monetary policy stance and the realised monetary policy interest rate on the basis of proximity, temporal structure and sensitivity to forecast horizon. The results show that the forecasts of South African insurance companies and international banks are closest to the realised monetary policy interest rate on average based on proximity, while the forecasts of South African banks and interest groups are closest to the realised monetary policy interest rate based on temporal structure. The results finally show deterioration of the professional forecasts the further away the forecast horizon and that the heterogeneity in forecast accuracy neither emanates from the country of primary listing nor primary business of the professional forecasts groups.

This paper aims to determine the effect of central bank monetary policy on financial asset prices in Indonesia from 1990 Q1 to 2020 Q4. Furthermore, this study measures the responses of three different asset prices: bond yield, stock price and exchange rate to central bank rate shocks using the structural vector autoregression model. The impulse response functions showed that tightening monetary policy in Indonesia appreciated the exchange rate in four periods, lowered stock prices in five periods, and increased bond yield in all periods. These results imply that an increase in monetary policy interest rate appreciates exchange rate, lowers the stock price, and reduces bond yield. The result of variance decomposition showed that the most dominant central bank rate prediction was in predicting forecast error variance of bond yield but the smallest in predicting forecast error variance of the exchange rate. These results corroborated the hypothesis that tightening monetary policy in Indonesia increases financial asset prices. It also highlighted the informational role of monetary policy interest rate in stabilizing financial asset prices.

This paper estimates a forward-looking reaction function with time-varying parameters to examine changes in the Brazilian monetary policy under the inflation-targeting regime. As the monetary policy rule has endogenous regressors, the conventional Kalman filter cannot be applied. Thus, the two-step procedure proposed by Kim and Nelson (J Monet Econ 53:1949–1966, 2006) is used for consistent estimation of the hyper-parameters of the model. The results indicate that the reaction function parameters of the Central Bank of Brazil are time-varying and that the regressors of that function are endogenous. Besides, we observed that: (i) the monetary policy interest rate (Selic rate) responses to current inflation and the inflationary expectations present considerable changes and have diminished with the passing of time; (ii) since mid-2010, policy rule has violated the Taylor principle; (iii) the implicit target for the Selic interest rate has shown a decline over time; and (iv) the degree of interest rate smoothing has shown a relative stability. Finally, the policy instrument response to the output gap presents an increasing trend over the 2010–2011 period.

During the first quarter of 2025 (1Q25), global economy began to slow down, contrasting with the resilience observed in previous periods. This change was associated to new trade tensions between the US and its main partners, resulting in a downward revision of global growth expectations and an increase in risk perception among investors. Additionally, this report includes an analysis of market movements during the early days of April, following the announcements regarding the US trade policy during that period. Global growth expectations were revised downward, particularly for the US and its major trading partners, due to a deterioration in the external environment and increasing trade tensions. - The adjustment in projections for developed economies reflects the uncertainty generated from trade policy announcements made by the new US administration. - The international financial environment was marked by high volatility, driven by the growing uncertainty in both global commercial and fiscal areas. - This uncertainty intensified after the implementation of new tariffs by the US in early April, causing significant adverse reactions across various international financial markets. - So far in April, markets have shown an unusual performance: The US dollar has depreciated steadily, while Treasury bond yields (Treasuries) have increased, an unusual combination in a context of increased risk aversion. Inflation continued to exceed the targets set by central banks in major developed economies after the rebound observed in the fourth quarter of 2024. - In response to this environment, central banks in advanced economies adopted a cautious monetary policy stance, reflecting persistent inflationary pressures and global uncertainty arising from changes in trade policy. - Some central banks, considering specific domestic conditions, continued to lower their interest rates despite the uncertain global environment. - Monetary policy expectations were revised towards a path with deeper interest rate cuts, in a context of high volatility and uncertainty regarding economic growth and fiscal sustainability. - In Latin America, inflation and inflation expectations showed a mixed performance, although they generally remained above the targets set by the region's central banks. - In Colombia, although inflation continued its downward trend, upward surprises in January and February moderated the pace of correction and exerted upward pressure on inflationary expectations. Locally, the Board of Directors of Banco de la República (the Central Bank of Colombia) maintained the Monetary Policy Rate (MPR) at 9.5%. This response is due to the slowdown in the reduction of inflation and inflation expectations at the beginning of the quarter, as well as signs of higher dynamism in economic activity. - This decision reflected a cautious stance against the high levels of uncertainty, both locally and globally. - Financial markets in Colombia continue to anticipate cuts in the MPR, although these expectations were adjusted towards smaller reductions than those projected at the end of 2024. - In the first days of April, expectations for rate cuts intensified due to a greater global risk perception. As for the debt markets, US Treasuries appreciated during 1Q25. However, they lost value in April following tariff announcements by the US administration. - In Latin America, most sovereign bonds appreciated during the quarter, aligned with the movement of Treasuries and expectations of deeper cuts in monetary policy rates. However, this trend moderated in April due to an increase in global risk aversion. - Contrasting with other countries in the region, Colombian government bonds continued the devaluation trend that began in 2024, reflecting domestic fiscal uncertainty, which was accentuated in April by rising external uncertainty. - Despite the unfavorable international context, emerging countries continued to receive positive foreign portfolio investment inflows during 1Q25, extending the favorable trend observed throughout 2024. - In Colombia, foreign investors partially reversed their selling trend in Colombian Treasury Securities (TES) observed since 2023 and increased their participation in the local public debt market. - In early April, sales resumed in line with the greater global uncertainty. Regarding the foreign exchange market, the US dollar weakened vis-a-vis currencies from both developed and emerging economies during 1Q25, driven by the expectation of an economic slowdown in the US, increased fiscal and trade concerns, and the possibility of lower rates by the Federal Reserve. - Latin American currencies appreciated during the quarter, supported by domestic factors such as the adjustment of monetary policy expectations and corrective movements in their exchange rates. - The Colombian peso appreciated in 1Q25, driven by the global weakening of the US dollar and the attractiveness of high local interest rates for international investors (carry trade). - The peso began to depreciate during the first days of April, pressured by the rising global uncertainty and a decline in international oil prices.

This study explores interconnections between risk behaviour in the financial sector, particularly banking sector, with monetary policy stance. Referring Bernanke and Blinder (1988) modified model for analyzing the bank credit behavior, we develop an empirical model to test the role of risk behaviour in monetary policy transmission mechanism. Vector Error Correction Model are applied to test the significance of interaction between risk variables and monetary policy stance in the short run dynamics of credit behavior around its long-run cointegration with real GDP. Some empirical results emerge from this preliminary study. First, there is early indication that risk taking channel in the monetary policy transmission mechanism exists in Indonesia during analysis period. Second, risk variables and credit tend to move procyclicalyl while monetary policy stance tends to a-cyclical. Third, pro-cyclical behavior of credit and risk variables reverses the effect of loose monetary policy stance, and there is an indication of asymmetric effect between tight monetary policy and loose monetary policy in Indonesian economy. These empirical findings bring about policy recommencations for better understanding on the risk behavior in the banking sector, as well as integration beetween monetary dan financial sector policies.JEL Code : E52, E58,Keyword: Monetary Policy Transmission Mechanism, Monetary Policy Stance, Banking Risk Behavior, Risk Perception

The main thesis of this paper is that low, stable inflation, implying price stability, is important for promoting and sustaining economic growth in the midst of shocks of both domestic and foreign origin. The paper makes an overview of inflation, inflation volatility and monetary policy in Malaysia since the late 1950s and provides some evidence for a link between inflation volatility and economic growth. As part of determining the appropriate strategy of monetary policy for price stability, the paper investigates some monetary relations—namely the stability of the money-demand function and the linkages among money, output and prices—which form the foundation of a money-based monetary policy strategy under a flexible exchange rate system. The empirical results suggest that the narrow money-demand function in Malaysia remained stable over the period 1971–2012 and that cointegral-causal linkages existed in this country among money, output and prices throughout this period. These results give credence to deployment of monetary aggregates as an instrument of monetary policy, especially when the flexibility, effectiveness of a zero-bound interest rate remains doubtful as an instrument of monetary policy in a low-inflation environment. Nevertheless, Malaysia has apparently taken the stance that money does not matter insofar as inflation and its volatility are concerned. The money growth rate has remained volatile in this country and contributed to high and volatile inflation for most of the time over the study period. Some empirical results suggest that despite the impression of rule-based monetary strategy, Malaysia did not conduct a rule-based monetary policy—within either monetary targeting or inflation targeting—to keep inflation low and stable. Instead, the Bank Negara Malaysia (central bank of Malaysia) used discretionary monetary policy to achieve multiple objectives, including rapid economic growth. An outcome of this policy was elevated inflation volatility, which affected real interest and exchange rates and raised output volatility. The paper concludes that improved monetary policy transparency and elevated monetary policy credibility are expected to make a rule-based monetary policy more effective and keep inflation low and stable.

A NYONE WHO DISCUSSES the U. S. balance of payments problem nowadays, and what should be done about it, invariably will mention monetary policy. He not only will mention monetary policy; he will pass judgment on it. If the speaker is an American or European banker, he is likely to say what we need is less monetary ease. The President's balance-ofpayments program, outlined in his message to Congress on February 10, has been widely criticized in the financial community here and abroad for not recognizing the need for a tighter monetary policy and higher interest rates. If the speaker is a university professor of economics, it is hard to predict what he will say, except that it will be critical. One group of professors will say that what we need is a floating exchange rate; then our monetary policy could be more expansionary. This, in turn, would help reduce our rate of unemployment; it would enable our economy to grow faster, and it also would enable us to stop being a pincushion for General DeGaulle. On the other hand, anyone who discusses U. S. monetary policy nowadays will almost certainly mention the balance of payments situation. If he is predisposed toward tighter money, he will use the balance of payments situation as a battering ram to smash any suggestion that monetary policy should be made somewhat easier. Besides, he will assert, the unemployment problem is structural, so an easier monetary policy wouldn't reduce it. However, if the speaker is predisposed toward easier money, he may pooh-pooh the sensitivity of international capital flows to differences between U. S. and foreign interest rates. Even more probably, he may say that we cannot let European central bankers and ex-generals determine our monetary policy. The exponents of this point of view would have monetary policy be guided only by considerations of domestic full employment. According to them, the high unemployment rate is caused by inadequate aggregate demand, rather than by structural defects. As to the resulting reaction of foreigners, the advocates of fullsteam-ahead would insist that the foreigners really can't afford to do anything more than scream and to take probing actions to test our nerves. To do more than that would wreck the entire international financial mechanism, thereby precipitating a worldwide crisis from which they would suffer as much as we would; hence they would not dare to do more than protest. The advocates of this latter position, by and large, are academicians who have never met a European central banker. U. S. Government officials and commercial bankers who have done so are much more cautious. They have seen the reds of their counterparts' eyes, and are not at all sure that they are bluffing. Besides, even bluffing can precipitate crises unintended and undesired by all concerned. It is a mark of maturity and responsibility to avoid goading an opponent to a point where he may feel impelled to pull a bluff that might possibly slip out of his control. In international monetary affairs, as in international diplomacy, brinkmanship can be a deadly game.

The Risk-Taking Channel of Monetary Policy Exploring All Avenues

The lending channel of monetary policy in Indonesia

MUNDELL'S article on "The Appropriate Use of Monetary and Fiscal Policy" filled a gap left by Meade's balance of trade approach. For the latter, either fiscal or monetary policy could be used to affect the level of income and, concomitantly, the level of imports and the trade balance. An expansionary policy leads to a deterioration of the trade balance, and consequently yields an overall improvement only when unemployment is accompanied by a surplus in the foreign account. A contractionary policy improves the balance of trade and serves internal and external balance only when an economy has inflation and a surplus in the external account. The analysis requires a trade-off between internal and external balance in economies with inflation and a surplus or, on the other hand, unemployment and a deficit. In order to correct imbalances in both sectors a policy instrument must be attached to each goal. By introducing capital flows responsive to interest rate differentials, Mundell was able to show that the balance of payments would be responsive primarily to monetary policy, leaving fiscal policy to deal with the level of national income.

National Bank of Romania establishes the monetary policy interest rate. The characteristicsof the Romanian’s financial system have impact on the degree of correlation between interest rates inthe banking system. This research uses the method of analyses of the impact of monetary policychanges in interest rate on key macroeconomic variables and on agriculture credit. The dimensionsand the evolution of agricultural credit show the restricted access of farms to the financial bankresources during the period 2007-2011. It is also evaluated the vulnerability of the agricultural system.The access of agricultural farms to the bank credit offer is determined through a series of factors.Romanian agriculture faced special problems regarding access to bank credits, because in competitionwith other sectors in the economic activity (industry, commerce, transportation etc.) agriculture wasthought to be unattractive and with a high risk for the banking sector. The evolution of the interest ratehas also a great impact on the evolution of agricultural products prices. Annual National Bank interestrates and inflation rates created difficulties in realizing the main objective - the prices stability. On thethird millennium, the development of a performing agriculture depends largely on the flexibility andefficiency of the crediting system practiced by the commercial banks and the access of agriculturalfarms to bank credits.

This article discusses ‘unconventional’ monetary policy after the 2008 crisis. The focus is the original theoretical basis for such policy and possible Keynesian readings and criticisms. Drawing inspiration mainly from Keynes (1930; 1936) and Minsky (1975), the paper seeks to explain why ultra-low/negative interest rates neither caused ‘rentiers’ to die, nor achieved full employment. The main hypothesis goes in the direction pointed to by Keynes: the problem is the low marginal efficiency of capital, the liquidity trap, and the lack of active government fiscal policy, which should be used in conjunction with monetary policy that maintains low long-term interest rates in order to spur investment. Monetary policy and very low/negative interest rates seem insufficient to overcome low growth. They are also incapable, at least in the short term, of promoting euthanasia of the rentiers as current monetary policy allows financial institutions to benefit from the capital gains it spurs.