Colombia’s central bank raised its benchmark rate by 25 basis points to 12.25% on September 30, its first move in months and the highest level since 2024. The board voted 4-2 in favour of the increase, with one director calling for a 50 basis point move, in a surprise against the market consensus, which had expected rates to hold at 12%. The bank said in a statement that the hike would keep a restrictive stance in line with expectations of a declining inflation path through 2027.
Annual inflation has run above the bank’s 2-4% target band all year. August came in at 6.2%, services inflation at 7.2%, and expectations are still above target at every horizon the bank tracks.
The credibility problem behind the move
Banco de la República has spent the past two years missing its inflation target after an aggressive global tightening cycle left the economy weaker but prices stickier than the bank’s models assumed. One economist described this week’s move as the bank’s fourth consecutive policy surprise in the tightening direction, and the surprise element matters more than the size: markets had priced out further hikes after months of stability, and the board chose to move anyway.
Finance Minister Miguel Gómez, who sits on the board for the new government and was attending his first decision, said afterwards that the panel concluded a moderate 25 basis point increase was the best policy. The bank is signalling, publicly and somewhat pedantically, that it would rather defend the inflation target than protect momentum in a cooling economy, and the vote split shows how much disagreement that choice produced inside the boardroom.
The immediate market reaction was modest. The official TRM exchange rate certified at 3,312.84 pesos per dollar for October 1, firmer than the previous two sessions, and local economists read the move as a floor-setting action rather than the start of a new tightening cycle.
Brazil: fiscal anxiety over door one, elections over door two
Brazil, the region’s largest economy, is fighting on two fronts. Central bank data published this week showed gross government debt rising to 82.9% of GDP, driven mostly by higher interest expenses, and domestic bonds sold off as investors questioned the trajectory of primary spending. A presidential election looms next October, and candidates on both sides have already started writing spending pledges that the current fiscal framework will have to absorb or refuse.
The central bank pointed to persistent inflation pressures as it reinforced its restrictive stance, even as recent activity and labor market data showed signs of cooling.
That leaves central bank president Gabriel Galípolo in the same position as his Colombian counterpart, but with a harder political backdrop: a fiscal authority that spends, a bond market that watches, and a rate path that cannot be set without an opinion on both. Local forecasters have pushed their expected peak for the Selic rate upward this quarter, and the currency has been the pressure valve. Resilient employment alongside elevated fiscal and credit pressures has complicated the outlook for further easing.
The regional contrast is sharpened by the commodity cycle. Oil prices have stayed elevated on renewed US-Iran friction, and that cuts both ways for Latin producers. It lifts export revenue and improves the terms of trade in Bogotá, Brasília and Caracas, but it also feeds directly into the inflation prints those same central banks are trying to bring down. Scotiabank’s FX strategy team noted this week that the extent and duration of the rise in energy prices is a key consideration for central bank policymakers, driving a continued rise in tightening expectations across major developed economies, and the same mathematics applies with more force where inflation is already at 6%.
The read across the region
Latin America’s inflation fight is diverging rather than converging. Mexico’s central bank, Banxico, is still cutting from its 2023 peak, Chile has moved into single-digit rate territory, and the region’s largest economy is weighing when to start easing. Colombia is going the other way, and the reasons are specific: an indexed minimum wage mechanism that hard-wires past inflation into future pay, regulated price increases that move with the calendar rather than the cycle, and a service sector where wage settlements keep running ahead of the target.
For traders the practical mapping is straightforward. A Colombian rate at 12.25% offers some of the highest real policy rates in emerging markets, which explains why the peso firmed on a hike that surprised the consensus. Bond desks read the same data differently, since a central bank that keeps missing its inflation target eventually pays for it in the long end of the curve, and the spread between Colombian and US Treasury yields has widened in recent sessions even as the currency strengthened. Carry traders and duration investors are, in effect, placing opposite bets on the same decision, and both can be right for now.
The second half of October brings the next test for all three. Colombia publishes September inflation figures in the first week of the month, a print that will either vindicate the hike or call it insufficient. Brazil’s fiscal package and its debt trajectory will land in Congress before the end of the month. And Mexico’s next policy decision falls in the same window, where the question is not whether to cut but how much slower to go if oil prices stay elevated. The region enters the final quarter of 2026 with more policy dispersion than at any point in the post-pandemic cycle.