Monetary Policy Report, April 2023

Inflation would peak in March and start to gradually decline as of the second quarter of 2023, bringing inflation back to the 3% target over the next two years. In March 2023, inflation continued to increase, reaching 13.3%. This increase is mainly explained by higher-than-expected growth of perishable food prices, a demand that remains persistently strong, the high inflation of 2022 being used in many cases to calculate price adjustments in 2023, and the aggregate effects of exchange rate increases in recent months, among others. Starting in the second quarter, inflation would begin to fall and this decline would continue over the next two years. This would occur as food price increases gradually abate, exchange rate pressures on prices would moderate, and import logistics costs and prices of imported inputs, goods and food would continue to temper. Several factors support this expected inflation decline, including lower cost increases measured by the producer price index, decreases in certain measures of inflation expectations of financial market operators or those who monitor the behavior of the economy, and lower observed increases in food prices. The cumulative monetary policy interest rate adjustments will contribute to lower excess spending and reduce inflation. The economy would maintain the high levels of activity already achieved, albeit with lower growth rates, which would contribute to reducing inflation. The economy is growing at a lower pace than in the previous year, which is normal after two years of rapid growth that led to high output levels and a significant decline in the unemployment rate, which is at its lowest level since 2018. The current high production levels are the result of high spending by both households and businesses (consumption and investment). This spending is excessive relative to the country's income, reflected in the strong growth of imports and the large external deficit seen in 2022. The technical staff forecasts economic growth of 1% in 2023 and 1% in 2024, mainly due to moderate consumption and investment. These low growth rates would lessen inflation and the external deficit over the next two years. A heightened policy interest rate is required to ensure price stabilization and contribute to the sustainable growth of the Colombian economy. Accordingly, Banco de la República has adjusted its monetary policy interest rate in response to the high demand and inflation. From September 2021 to April 2023, the Board of Directors raised the monetary policy interest rate from 1.75% to 13.25%

Monetary Policy Report - July 2022

In the second quarter, annual inflation (9.67%), the technical staff’s projections and its expectations continued to increase, remaining above the target. International cost shocks, accentuated by Russia's invasion of Ukraine, have been more persistent than projected, thus contributing to higher inflation. The effects of indexation, higher than estimated excess demand, a tighter labor market, inflation expectations that continue to rise and currently exceed 3%, and the exchange rate pressures add to those described above. High core inflation measures as well as in the producer price index (PPI) across all baskets confirm a significant spread in price increases. Compared to estimates presented in April, the new forecast trajectory for headline and core inflation increased. This was partly the result of greater exchange rate pressure on prices, and a larger output gap, which is expected to remain positive for the remainder of 2022 and which is estimated to close towards yearend 2023. In addition, these trends take into account higher inflation rate indexation, more persistent above-target inflation expectations, a quickening of domestic fuel price increases due to the correction of lags versus the parity price and higher international oil price forecasts. The forecast supposes a good domestic supply of perishable foods, although it also considers that international prices of processed foods will remain high. In terms of the goods sub-basket, the end of the national health emergency implies a reversal of the value-added tax (VAT) refund applied to health and personal hygiene products, resulting in increases in the prices of these goods. Alternatively, the monetary policy adjustment process and the moderation of external shocks would help inflation and its expectations to begin to decrease over time and resume their alignment with the target. Thus, the new projection suggests that inflation could remain high for the second half of 2022, closing at 9.7%. However, it would begin to fall during 2023, closing the year at 5.7%. These forecasts are subject to significant uncertainty, especially regarding the future behavior of external cost shocks, the degree of indexation of nominal contracts and decisions made regarding the domestic price of fuels. Economic activity continues to outperform expectations, and the technical staff’s growth projections for 2022 have been revised upwards from 5% to 6.9%. The new forecasts suggest higher output levels that would continue to exceed the economy’s productive capacity for the remainder of 2022. Economic growth during the first quarter was above that estimated in April, while economic activity indicators for the second quarter suggest that the GDP could be expected to remain high, potentially above that of the first quarter. Domestic demand is expected to maintain a positive dynamic, in particular, due to the household consumption quarterly growth, as suggested by vehicle registrations, retail sales, credit card purchases and consumer loan disbursement figures. A slowdown in the machinery and equipment imports from the levels observed in March contrasts with the positive performance of sales and housing construction licenses, which indicates an investment level similar to that registered for the first three months of the year. International trade data suggests the trade deficit would be reduced as a consequence of import levels that would be lesser than those observed in the first quarter, and stable export levels. For the remainder of the year and 2023, a deceleration in consumption is expected from the high levels seen during the first half of the year, partially as a result of lower repressed demand, tighter domestic financial conditions and household available income deterioration due to increased inflation. Investment is expected to continue its slow recovery while remaining below pre-pandemic levels. The trade deficit is expected to tighten due to projected lower domestic demand dynamics, and high prices of oil and other basic goods exported by the country. Given the above, economic growth in the second quarter of 2022 would be 11.5%, and for 2022 and 2023 an annual growth of 6.9% and 1.1% is expected, respectively. Currently, and for the remainder of 2022, the output gap would be positive and greater than that estimated in April, and prices would be affected by demand pressures. These projections continue to be affected by significant uncertainty associated with global political tensions, the expected adjustment of monetary policy in developed countries, external demand behavior, changes in country risk outlook, and the future developments in domestic fiscal policy, among others. The high inflation levels and respective expectations, which exceed the target of the world's main central banks, largely explain the observed and anticipated increase in their monetary policy interest rates. This environment has tempered the growth forecast for external demand. Disruptions in value chains, rising international food and energy prices, and expansionary monetary and fiscal policies have contributed to the rise in inflation and above-target expectations seen by several of Colombia’s main trading partners. These cost and price shocks, heightened by the effects of Russia's invasion of Ukraine, have been more prevalent than expected and have taken place within a set of output and employment recovery, variables that in some countries currently equal or exceed their projected long-term levels. In response, the U.S. Federal Reserve accelerated the pace of the benchmark interest rate increase and rapidly reduced liquidity levels in the money market. Financial market actors expect this behavior to continue and, consequently, significantly increase their expectations of the average path of the Fed's benchmark interest rate. In this setting, the U.S. dollar appreciated versus the peso in the second quarter and emerging market risk measures increased, a behavior that intensified for Colombia. Given the aforementioned, for the remainder of 2022 and 2023, the Bank's technical staff increased the forecast trajectory for the Fed's interest rate and reduced the country's external demand growth forecast. The projected oil price was revised upward over the forecast horizon, specifically due to greater supply restrictions and the interruption of hydrocarbon trade between the European Union and Russia. Global geopolitical tensions, a tightening of monetary policy in developed economies, the increase in risk perception for emerging markets and the macroeconomic imbalances in the country explain the increase in the projected trajectory of the risk premium, its trend level and the neutral real interest rate1. Uncertainty about external forecasts and their consequent impact on the country's macroeconomic scenario remains high, given the unpredictable evolution of the conflict between Russia and Ukraine, geopolitical tensions, the degree of the global economic slowdown and the effect the response to recent outbreaks of the pandemic in some Asian countries may have on the world economy. This macroeconomic scenario that includes high inflation, inflation forecasts, and expectations above 3% and a positive output gap suggests the need for a contractionary monetary policy that mitigates the risk of the persistent unanchoring of inflation expectations. In contrast to the forecasts of the April report, the increase in the risk premium trend implies a higher neutral real interest rate and a greater prevailing monetary stimulus than previously estimated. For its part, domestic demand has been more dynamic, with a higher observed and expected output level that exceeds the economy’s productive capacity. The surprising accelerations in the headline and core inflation reflect stronger and more persistent external shocks, which, in combination with the strength of aggregate demand, indexation, higher inflation expectations and exchange rate pressures, explain the upward projected inflation trajectory at levels that exceed the target over the next two years. This is corroborated by the inflation expectations of economic analysts and those derived from the public debt market, which continued to climb and currently exceed 3%. All of the above increase the risk of unanchoring inflation expectations and could generate widespread indexation processes that may push inflation away from the target for longer. This new macroeconomic scenario suggests that the interest rate adjustment should continue towards a contractionary monetary policy landscape. 1.2. Monetary policy decision Banco de la República’s Board of Directors (BDBR), at its meetings in June and July 2022, decided to continue adjusting its monetary policy. At its June meeting, the BDBR decided to increase the monetary policy rate by 150 basis points (b.p.) and its July meeting by majority vote, on a 150 b.p. increase thereof at its July meeting. Consequently, the monetary policy interest rate currently stands at 9.0% .   1 The neutral real interest rate refers to the real interest rate level that is neither stimulative nor contractionary for aggregate demand and, therefore, does not generate pressures that lead to the close of the output gap. In a small, open economy like Colombia, this rate depends on the external neutral real interest rate, medium-term components of the country risk premium, and expected depreciation. Box 1: A Weekly Indicator of Economic Activity for Colombia Juan Pablo Cote Carlos Daniel Rojas Nicol Rodriguez Box 2: Common Inflationary Trends in Colombia Carlos D. Rojas-Martínez Nicolás Martínez-Cortés Franky Juliano Galeano-Ramírez Box 3: Shock Decomposition of 2021 Forecast Errors Nicolás Moreno Aria

Monetary Policy Report - January 2022

1.1 Macroeconomic summary Several factors contributed to an increase in projected inflation on the forecast horizon, keeping it above the target rate. These included inflation in December that surpassed expectations (5.62%), indexation to higher inflation rates for various baskets in the consumer price index (CPI), a significant real increase in the legal minimum wage, persistent external and domestic inflationary supply shocks, and heightened exchange rate pressures. The CPI for foods was affected by the persistence of external and domestic supply shocks and was the most significant contributor to unexpectedly high inflation in the fourth quarter. Price adjustments for fuels and certain utilities can explain the acceleration in inflation for regulated items, which was more significant than anticipated. Prices in the CPI for goods excluding food and regulated items also rose more than expected. This was partly due to a smaller effect on prices from the national government’s VAT-free day than anticipated by the technical staff and more persistent external pressures, including via peso depreciation. By contrast, the CPI for services excluding food and regulated items accelerated less than expected, partly reflecting strong competition in the communications sector. This was the only major CPI basket for which prices increased below the target inflation rate. The technical staff revised its inflation forecast upward in response to certain external shocks (prices, costs, and depreciation) and domestic shocks (e.g., on meat products) that were stronger and more persistent than anticipated in the previous report. Observed inflation and a real increase in the legal minimum wage also exceeded expectations, which would boost inflation by affecting price indexation, labor costs, and inflation expectations. The technical staff now expects year-end headline inflation of 4.3% in 2022 and 3.4% in 2023; core inflation is projected to be 4.5% and 3.6%, respectively. These forecasts consider the lapse of certain price relief measures associated with the COVID-19 health emergency, which would contribute to temporarily keeping inflation above the target on the forecast horizon. It is important to note that these estimates continue to contain a significant degree of uncertainty, mainly related to the development of external and domestic supply shocks and their ultimate effects on prices. Other contributing factors include high price volatility and measurement uncertainty related to the extension of Colombia’s health emergency and tax relief measures (such as the VAT-free days) associated with the Social Investment Law (Ley de Inversión Social). The as-yet uncertain magnitude of the effects of a recent real increase in the legal minimum wage (that was high by historical standards) and high observed and expected inflation, are additional factors weighing on the overall uncertainty of the estimates in this report. The size of excess productive capacity remaining in the economy and the degree to which it is closing are also uncertain, as the evolution of the pandemic continues to represent a significant forecast risk. margin, could be less dynamic than expected. And the normalization of monetary policy in the United States could come more quickly than projected in this report, which could negatively affect international financing costs. Finally, there remains a significant degree of uncertainty related to the duration of supply chocks and the degree to which macroeconomic and political conditions could negatively affect the recovery in investment. The technical staff revised its GDP growth projection for 2022 from 4.7% to 4.3% (Graph 1.3). This revision accounts for the likelihood that a larger portion of the recent positive dynamic in private consumption would be transitory than previously expected. This estimate also contemplates less dynamic investment behavior than forecast in the previous report amid less favorable financial conditions and a highly uncertain investment environment. Third-quarter GDP growth (12.9%), which was similar to projections from the October report, and the fourth-quarter growth forecast (8.7%) reflect a positive consumption trend, which has been revised upward. This dynamic has been driven by both public and private spending. Investment growth, meanwhile, has been weaker than forecast. Available fourth-quarter data suggest that consumption spending for the period would have exceeded estimates from October, thanks to three consecutive months that included VAT-free days, a relatively low COVID-19 caseload, and mobility indicators similar to their pre-pandemic levels. By contrast, the most recently available figures on new housing developments and machinery and equipment imports suggest that investment, while continuing to rise, is growing at a slower rate than anticipated in the previous report. The trade deficit is expected to have widened, as imports would have grown at a high level and outpaced exports. Given the above, the technical staff now expects fourth-quarter economic growth of 8.7%, with overall growth for 2021 of 9.9%. Several factors should continue to contribute to output recovery in 2022, though some of these may be less significant than previously forecast. International financial conditions are expected to be less favorable, though external demand should continue to recover and terms of trade continue to increase amid higher projected oil prices. Lower unemployment rates and subsequent positive effects on household income, despite increased inflation, would also boost output recovery, as would progress in the national vaccination campaign. The technical staff expects that the conditions that have favored recent high levels of consumption would be, in large part, transitory. Consumption spending is expected to grow at a slower rate in 2022. Gross fixed capital formation (GFCF) would continue to recover, approaching its pre-pandemic level, though at a slower rate than anticipated in the previous report. This would be due to lower observed GFCF levels and the potential impact of political and fiscal uncertainty. Meanwhile, the policy interest rate would be less expansionary as the process of monetary policy normalization continues. Given the above, growth in 2022 is forecast to decelerate to 4.3% (previously 4.7%). In 2023, that figure (3.1%) is projected to converge to levels closer to the potential growth rate. In this case, excess productive capacity would be expected to tighten at a similar rate as projected in the previous report. The trade deficit would tighten more than previously projected on the forecast horizon, due to expectations of an improved export dynamic and moderation in imports. The growth forecast for 2022 considers a low basis of comparison from the first half of 2021. However, there remain significant downside risks to this forecast. The current projection does not, for example, account for any additional effects on economic activity resulting from further waves of COVID-19. High private consumption levels, which have already surpassed pre-pandemic levels by a large margin, could be less dynamic than expected. And the normalization of monetary policy in the United States could come more quickly than projected in this report, which could negatively affect international financing costs. Finally, there remains a significant degree of uncertainty related to the duration of supply chocks and the degree to which macroeconomic and political conditions could negatively affect the recovery in investment. External demand for Colombian goods and services should continue to recover amid significant global inflation pressures, high oil prices, and less favorable international financial conditions than those estimated in October. Economic activity among Colombia’s major trade partners recovered in 2021 amid countries reopening and ample international liquidity. However, that growth has been somewhat restricted by global supply chain disruptions and new outbreaks of COVID-19. The technical staff has revised its growth forecast for Colombia’s main trade partners from 6.3% to 6.9% for 2021, and from 3.4% to 3.3% for 2022; trade partner economies are expected to grow 2.6% in 2023. Colombia’s annual terms of trade increased in 2021, largely on higher oil, coffee, and coal prices. This improvement came despite increased prices for goods and services imports. The expected oil price trajectory has been revised upward, partly to supply restrictions and lagging investment in the sector that would offset reduced growth forecasts in some major economies. Elevated freight and raw materials costs and supply chain disruptions continue to affect global goods production, and have led to increases in global prices. Coupled with the recovery in global demand, this has put upward pressure on external inflation. Several emerging market economies have continued to normalize monetary policy in this context. Meanwhile, in the United States, the Federal Reserve has anticipated an end to its asset buying program. U.S. inflation in December (7.0%) was again surprisingly high and market average inflation forecasts for 2022 have increased. The Fed is expected to increase its policy rate during the first quarter of 2022, with quarterly increases anticipated over the rest of the year. For its part, Colombia’s sovereign risk premium has increased and is forecast to remain on a higher path, to levels above the 15-year-average, on the forecast horizon. This would be partly due to the effects of a less expansionary monetary policy in the United States and the accumulation of macroeconomic imbalances in Colombia. Given the above, international financial conditions are projected to be less favorable than anticipated in the October report. The increase in Colombia’s external financing costs could be more significant if upward pressures on inflation in the United States persist and monetary policy is normalized more quickly than contemplated in this report. As detailed in Section 2.3, uncertainty surrounding international financial conditions continues to be unusually high. Along with other considerations, recent concerns over the potential effects of new COVID-19 variants, the persistence of global supply chain disruptions, energy crises in certain countries, growing geopolitical tensions, and a more significant deceleration in China are all factors underlying this uncertainty. The changing macroeconomic environment toward greater inflation and unanchoring risks on inflation expectations imply a reduction in the space available for monetary policy stimulus. Recovery in domestic demand and a reduction in excess productive capacity have come in line with the technical staff’s expectations from the October report. Some upside risks to inflation have materialized, while medium-term inflation expectations have increased and are above the 3% target. Monetary policy remains expansionary. Significant global inflationary pressures and the unexpected increase in the CPI in December point to more persistent effects from recent supply shocks. Core inflation is trending upward, but remains below the 3% target. Headline and core inflation projections have increased on the forecast horizon and are above the target rate through the end of 2023. Meanwhile, the expected dynamism of domestic demand would be in line with low levels of excess productive capacity. An accumulation of macroeconomic imbalances in Colombia and the increased likelihood of a faster normalization of monetary policy in the United States would put upward pressure on sovereign risk perceptions in a more persistent manner, with implications for the exchange rate and the natural rate of interest. Persistent disruptions to international supply chains, a high real increase in the legal minimum wage, and the indexation of various baskets in the CPI to higher inflation rates could affect price expectations and push inflation above the target more persistently. These factors suggest that the space to maintain monetary stimulus has continued to diminish, though monetary policy remains expansionary. 1.2 Monetary policy decision Banco de la República’s board of directors (BDBR) in its meetings in December 2021 and January 2022 voted to continue normalizing monetary policy. The BDBR voted by a majority in these two meetings to increase the benchmark interest rate by 50 and 100 basis points, respectively, bringing the policy rate to 4.0%

Monetary Policy Report - October 2022

1.1 Macroeconomic summary In September, headline inflation (11.4% annually) and the average of core inflation indicators (8.6% annually) continued on a rising trend, and higher increases than expected were recorded. Forecasts increased again, and inflation expectations remained above 3%. Inflationary surprises in the third quarter were significant and widespread, and they are the result of several shocks. On the one hand, international cost and price shocks, which have mainly affected goods and foods, continue to exert upwards pressure on national inflation. In addition to these external supply shocks, domestic supply shocks have also affected foods. On the other hand, the strong recovery of aggregate demand, especially for private consumption and for machinery and equipment, as well as a higher accumulated depreciation of the Colombian peso and its pass-through to domestic prices also explain the rise in inflation. Indexation also contributes, both through the Consumer Price Index (CPI) and through the Producer Price Index (PPI), which continues to have a significant impact on electricity prices and, to a lesser degree, on other public utilities and rent. In comparison with July’s report, the new forecast trajectory for headline and core inflation (excluding food and regulated items) is higher in the forecast horizon, mainly due to exchange rate pressures, higher excess demand, and indexation at higher inflation rates, but it maintains a trend of convergence towards the target. In the case of food, a good domestic supply of perishable foods and some moderation in international processed food prices are still expected. However, the technical staff estimates higher pressures on this group’s prices from labor costs, raw material prices, and exchange rates. In terms of the CPI for regulated items, the new forecast supposes reductions in electricity prices at the end of the year, but the effects of indexation at higher inflation rates and the expected rises in fuel prices would continue to push this CPI group. Therefore, the new projection suggests that, in December, inflation would reach 11.3% and would decrease throughout 2023 and 2024, closing the year at 7.1% and 3.5%, respectively. These forecasts have a high level of uncertainty, due especially to the future behavior of international financial conditions, external price and cost shocks, the persistence of depreciation of the Colombian peso, the pace of adjustment of domestic demand, the indexation degree of nominal contracts, and the decisions that would be made regarding domestic fuel and electricity prices. Economic activity continues to surprise on the upside, and the projection of growth for 2022 rose from 6.9% to 7.9% but lowered for 2023 from 1.1% to 0.5%. Thus, excess demand is higher than estimated in the previous report, and it would diminish in 2023. Economic growth in the second quarterwas higher than estimated in July due to stronger domestic demand, mainly because of private consumption. Economic activity indicators for the third quarter suggest that the GDP would stay at a high level, above its potential, with an annual change of 6.4%, and 0.6% higher than observed in the second quarter. Nevertheless, these numbers reflect deceleration in its quarterly and annual growth. Domestic demand would show similar behavior, with a high value, higher than that of output. This can be explained partly by the strong behavior of private consumption and investment in machinery and equipment. In the third quarter, investment in construction would have continued with mediocre performance, which would still place it at levels lower than those observed before the pandemic. The trade deficit would have widened due to high imports with a stronger trend than that for exports. It is expected that, in the forecast horizon, consumption would decrease from its current high levels, partly as a consequence of tighter domestic financial conditions, lower repressed demand, higher exchange rate pressures on imported goods prices, and the deterioration of actual income due to the rise in inflation. Investment would continue to lag behind, without reaching the levels observed before the pandemic, in a context of high financing costs and high uncertainty. A lower projected behavior in domestic demand and the high levels of prices for oil and other basic goods that the country exports would be reflected in a reduction in the trade deficit. Due to all of this, economic growth for all of 2022, 2023, and 2024 would be 7.9%, 0.5%, and 1.3%, respectively. Expected excess demand (measured via the output gap) is estimated to be higher than contemplated in the previous report; it would diminish in 2023 and could turn negative in 2024. These estimates remain subject to a high degree of uncertainty related to global political tension, a rise in international interest rates, and the effects of this rise on demand and financial conditions abroad. In the domestic context, the evolution of fiscal policy as well as future measures regarding economic policy and their possible effects on macroeconomic imbalances in the country, among others, are factors that generate uncertainty and affect risk premia, the exchange rate, investment, and the country’s economic activity. Interest rates at several of the world’s main central banks continue to rise, some at a pace higher than expected by the market. This is in response to the high levels of inflation and their inflation expectations, which continue to exceed the targets. Thus, global growth projections are still being moderated, risk premia have risen, and the dollar continues to gain strength against other main currencies. International pressures on global inflation have heightened. In the United States, core inflation has not receded, pressured by the behavior of the CPI for services and a tight labor market. Consequently, the U.S. Federal Reserve continued to increase the policy interest rate at a strong pace. This rate is expected to now reach higher levels than projected in the previous quarter. Other developed and emerging economies have also increased their policy interest rates. Thus, international financial conditions have tightened significantly, which reflects in a widespread strengthening of the dollar, increases in worldwide risk premia, and the devaluation of risky assets. Recently, these effects have been stronger in Colombia than in the majority of its peers in the region. Considering all of the aforementioned, the technical staff of the bank increased its assumption regarding the U.S. Federal Reserve’s interest rate, reduced the country’s external demand growth forecast, and raised the projected trajectory for the risk premium. The latter remains elevated at higher levels than its historical average, within a context of high local uncertainty and of extensive financing needs from the foreign sector and the public sector. All of this results in higher inflationary pressures associated to the depreciation of the Colombian peso. The uncertainty regarding external forecasts and its impact on the country remain elevated, given the unforeseeable evolution of the conflict between Russia and Ukraine, of geopolitical tensions, and of the tightening of external financial conditions, among others. A macroeconomic context of high inflation, inflation expectations and forecasts above 3%, and a positive output gap suggests the need for contractionary monetary policy, compatible with the macroeconomic adjustment necessary to eliminate excess demand, mitigate the risk of unanchoring in inflation expectations, and guarantee convergence of inflation at the target. In comparison with the July report forecasts, domestic demand has been more dynamic, with a higher observed output level that surpasses the economy’s productive capacity. Headline and core inflation have registered surprising rises, associated with the effects of domestic and external price shocks that were more persistent than anticipated, with excess demand and indexation processes in some CPI groups. The country’s risk premium and the observed and expected international interest rates increased. As a consequence of this, inflationary pressures from the exchange rate rose, and in this report, the probability of the neutral real interest rate being higher than estimated increased. In general, inflation expectations for all terms and the bank’s technical staff inflation forecast for 2023 increased again and continue to stray from 3%. All of the aforementioned elevated the risk of unanchoring inflation expectations and could heighten widespread indexation processes that push inflation away from the target for a longer time. In this context, it is necessary to consolidate a contractionary monetary policy that tends towards convergence of inflation at the target in the forecast horizon and towards the reduction of excess demand in order to guarantee a sustainable output level trajectory. 1.2 Monetary policy decision In its September and October of 2022 meetings, Banco de la República’s Board of Directors (BDBR) decided to continue adjusting its monetary policy. In September, the BDBR decided by a majority vote to raise the monetary policy interest rate by 100 basis points (bps), and in its October meeting, unanimously, by 100bps. Therefore, the rate is at 11.0%. Boxes 1 Food inflation: a comparison with other countrie

Monetary Policy Report - October 2021

1.1 Macroeconomic summary Economic activity has recovered faster than projected, and output is now expected to return to pre-pandemic levels earlier than anticipated. Economic growth projections for 2021 and 2022 have been revised upward, though significant downward bias remains. (Graph 1.1). Colombia’s economy returned to recovery in the third quarter after significant supply shocks and a third wave of COVID-19 in the second. Negative shocks affecting mobility and output were absent in the third quarter, and some indicators of economic activity suggest that the rate of recovery in demand, primarily in consumption, outpaced estimates from the July Monetary Policy Report (MPR) in the context of widely expansive monetary policy. Several factors are expected to continue to contribute to output recovery for the rest of the year and into 2022, including the persistence of favorable international financial conditions, an expected improvement in external demand, and an increase in terms of trade. Increasing vaccination rates, the expectation of higher levels of employment and the consequent effect on household income, improved investment performance (which has not yet returned to pre-pandemic levels), and the expected stimulus from monetary policy that would continue to be expansive should also drive economic activity. As a result, output is estimated to have returned to its pre-pandemic level in the third quarter (previously expected in the fourth quarter). Growth is expected to decelerate in 2022, with excess productive capacity projected to close faster than anticipated in the previous report. Given the above, GDP growth projections have been revised upward for 2021 (9.8%, range between 8.4% and 11.2%) and 2022 (4.7%, range between 0.7% and 6.5%). If these estimates are confirmed, output would have grown by 2.3% on average between 2020 and 2022. This figure would be below long-term sustainable growth levels projected prior to the pandemic. The revised growth forecast for 2022 continues to account for a low basis of comparison from this year (reflecting the negative effects of COVID-19 and roadblocks in some parts of the country), and now supposes that estimated consumption levels for the end of 2021 will remain relatively stable in 2022. Investment and net exports are expected to recover at a faster pace than estimated in the previous report. Nevertheless, the downward risks to these estimates remain unusually significant, for several reasons. First, they do not suppose significant negative effects on the economy from possible new waves of COVID-19. Second, because private consumption, which has already surpassed pre-pandemic levels by a large margin, could perform less favorably than estimated in this forecast should it reflect a temporary phenomenon related to suppressed demand as service sectors re-open (e.g. tourism) and private savings accumulated during the pandemic are spent. Third, disruptions to supply chains could be more persistent than contemplated in this report and could continue to affect production costs, with a negative impact on the economy. Finally, the accumulation of macroeconomic imbalances could translate to increased vulnerability to changes in international financial conditions or in international and domestic economic agents’ perception of risk in the Colombian economy, representing a downward risk to growth. A higher-than-expected increase in inflation, the persistence of supply shocks, and reduced excess productive capacity have led to an increase in inflation projections above the target on the forecast horizon (Graph 1.2). Inflation increased above expectations to 4.51% in the third quarter, due in large part to the price behavior of foods and regulated items, and to a lesser extent to core inflation. Increased international prices and costs continue to generate upward pressure on various sub-baskets of the consumer price index (CPI), as has the partial reversion of some price relief measures implemented in 2020 in response to the COVID-19 pandemic. The inflation forecast has been revised upward due to external shocks that have proved more persistent than anticipated in the previous report and the effects of inflation indexation on some prices. Furthermore, excess productive capacity is expected to tighten at a faster pace than previously forecast, which would reduce downward pressures on core inflation. Given the above, overall year-end inflation is expected to reach 4.9% in 2021 and 3.6% in 2022. Core inflation (excluding foods and regulated items) for the same period is now forecast to be 2.5% and 3.9% (Graph 1.3), respectively, an increase due partly to temporary shocks associated with tax measures, such as the Colombian government’s VAT-free days1. These estimates retain a wide margin of uncertainty, partially associated with the magnitude of excess productive capacity and the speed with which it can be expected to tighten. Additional sources of uncertainty are rooted in increased price and measurement volatility based on an extension of Colombia’s health emergency status and tax relief measures approved as part of the government’s Social Investment Law (Ley de Inversión Social) (e.g. VAT-free days), which could make estimating core inflation on the forecast horizon more difficult. A final source of uncertainty is based on the risk of more persistent supply shocks that would affect inflation expectations or increase indexation in some baskets of the CPI relative to the forecast. International demand as it pertains to Colombia is expected to continue its recovery, amid increased pressure on global inflation rates. International financial conditions should continue to be favorable, though external financing costs are expected to increase on the forecast horizon. Growth among Colombia’s major trade partners was higher than expected in the first half of the year, amid significant advances in vaccination programs, ample international liquidity, and a recovery in the trade of goods. Nevertheless, the propagation of new strains of COVID-19 and the persistence of global supply chain issues have moderated growth forecasts for the rest of 2021. Given the above, the growth forecast for Colombia’s major trade partners has been revised from 6.0% to 6.3% for 2021 and from 3.5% to 3.4% in 2022. Colombia’s terms of trade have increased due primarily to increases in oil, coffee, and coal prices, and despite increases in the price of goods and services imports. Oil prices are still expected to decline as challenges in gas and coal markets diminish, and as the global supply of crude oil increases. Increased freight prices and disruptions to supply chains continue to generate significant increases in global production costs, which, together with a recovery in global demand, has put upward pressure on external inflation. Numerous emerging market economies have begun to normalize monetary policy in this context. In the United States, markets expect higher inflation for 2021 and part of 2022, with tapering beginning at the end of this year and a first increase in the monetary policy interest rate at the end of 2022. Another increase would be expected in the middle of 2023. For its part, Colombia’s sovereign risk premium has been higher than in the previous quarter, and the forecast in this report supposes a faster convergence to levels above its 15-year average, due in part to the accumulation of macroeconomic imbalances. International financial conditions are expected to continue to be loose, though to a lesser degree than projected in the previous report. The expected increase in Colombia’s external financing costs could be more significant if upward pressures on inflation in the United States persist and the Fed normalizes monetary policy earlier than anticipated. In general, uncertainty remains unusually high in the global context, due to unknowns over the evolution of the pandemic, the persistence of disruptions to global supply chains, the impact of the energy crisis, and more significant deceleration in China, among other factors. Excess productive capacity has tightened faster than expected in the previous report (Graph 1.4). Overall and core inflation are both on growth trajectories, expected inflation has increased (though it remains close to 3% in the medium term), and monetary policy continues to be expansive. The unexpectedly high rate of economic growth and the evolution of some prices in the economy suggest that excess capacity is tightening faster than previously expected. At the same time, the improved performance of domestic demand has been reflected in an expansion of the current account deficit. Core inflation continues below 3%, but is trending upward, while expected inflation has increased but remains close to 3% in the medium term. However, the risk of more persistent supply shocks that would increase prices and affect inflation expectations, lead to higher indexation, and move inflation away from the target more persistently has increased. The labor market continues to be loose, though figures from September showed more significant recovery than previously expected. Given the above, the output gap is expected to remain negative, though to a lesser degree than previously forecast, while the temporary supply shocks that have affected inflation are now expected to be more persistent. As a result, the technical staff expects that the trade-off between excess productive capacity and inflation above the target to continue, but with a balance of risks inclined toward higher inflation rates. 1.2 Monetary policy decision Banco de la República’s board of directors (BDBR) decided to begin normalizing monetary policy in its meeting in September 2021. In its September and October meetings the BDBR decided by majority to increase the monetary policy interest rate by 25 and 50 basis points, respectively, to 2.5% (Graph 1.5). Box 1 The Role of External Pressures in the Recent Behavior of Inflation in Colombia Autores: Sergio Restrepo Ángel, Carlos Huertas Campos, Sara Naranjo Saldarriaga, Santiago Forero Alvarado Box 2 Behavior of Commercial Loans in Domestic Currency, March 2020 - September 2021 Autores: Tatiana Andrea Mora Arbeláez, Luis Hernán Calderón Lópe

Monetary Policy Report, January 2023

1. Macroeconomic Summary In December, headline inflation (13.1%) and the average of the core inflation measures (10.3%) continued to trend upward, posting higher rates than those estimated by the Central Bank's technical staff and surpassing the market average. Inflation expectations for all terms exceeded the 3.0% target. In that month, every major group in the Consumer Price Index (CPI) registered higher-than-estimated increases, and the diffusion indicators continued to show generalized price hikes. Accumulated exchange rate pressures on prices, indexation to high inflation rates, and several food supply shocks would explain, in part, the acceleration in inflation. All of this is in a context of significant surplus demand, a tight labor market, and inflation expectations at different terms that exceed the 3.0% target. Compared to the October edition of the Monetary Policy Report, the forecast path for headline and core inflation (excluding food and regulated items: EFR) increased (Graphs 1.1 and 1.2), reflecting heightened accumulated exchange rate pressures, price indexation to a higher inflation rate (CPI and the producer price index: PPI), and the rise in labor costs attributed to a larger-than-estimated adjustment in the minimum wage. Nevertheless, headline inflation is expected to begin to ease by early 2023, although from a higher level than had been estimated in October. This would be supported initially by the slowdown forecast for the food CPI due to a high base of comparison, the end anticipated for the shocks that have affected the prices of these products, and the estimated improvement in external and domestic supply in this sector. In turn, the deterioration in real household income because of high inflation and the end of the effects of pent-up demand, plus tighter external and domestic financial conditions would contribute to diluting surplus demand in 2023 and reducing inflation. By the end of 2023, both headline and core (EFR) inflation would reach 8.7% and would be 3.5% and 3.8%, respectively, by December 2024. These forecasts are subject to a great deal of uncertainty, especially concerning the future behavior of international financial conditions, the evolution of the exchange rate, the pace of adjustment in domestic demand, the extent of indexation of nominal contracts, and the decisions taken regarding the domestic price of fuel and electricity. In the third quarter, economic activity surprised again on the upside and the growth projection for 2022 rose to 8.0% (previously 7.9%). However, it declined to 0.2% for 2023 (previously 0.5%). With this, surplus demand continues to be significant and is still expected to weaken during the current year. Annual economic growth in the third quarter (7.1 % SCA)1 was higher than estimated in October (6.4 % SCA), given stronger domestic demand specifically because of higher-than-expected investment. Private consumption fell from the high level witnessed a quarter earlier and net exports registered a more negative contribution than anticipated. For the fourth quarter, economic activity indicators suggest that gross domestic product (GDP) would have remained high and at a level similar to that observed in the third quarter, with an annual variation of 4.1%. Domestic demand would have slowed in annual terms, although at levels that would have remained above those for output, mainly because of considerable private consumption. Investment would have declined slightly to a value like the average observed in 2019. The real trade deficit would have decreased due to a drop in imports that was more pronounced than the estimated decline in exports. On the forecast horizon, consumption is expected to decline from current elevated levels, partly because of tighter domestic financial conditions and a deterioration in real income due to high inflation. Investment would also weaken and return to levels below those seen before the pandemic. In real terms, the trade deficit would narrow due to a lower momentum projection for domestic demand and higher cumulative real depreciation. In sum, economic growth for all of 2022, 2023, and 2024 would stand at 8.0%, 0.2% and 1.0%, respectively (Graph 1.3). Surplus demand remains high (as measured by the output gap) and is expected to decline in 2023 and could turn negative in 2024 (Graph 1.4). Although the macroeconomic forecast includes a marked slowdown in the economy, an even greater adjustment in domestic absorption cannot be ruled out due to the cumulative effects of tighter external and domestic financial conditions, among other reasons. These estimates continue to be subject to a high degree of uncertainty, which is associated with factors such as global political tensions, changes in international interest rates and their effects on external demand, global risk aversion, the effects of the approved tax reform, the possible impact of reforms announced for this year (pension, health, and labor reforms, among others), and future measures regarding hydrocarbon production. In 2022, the current account deficit would have been high (6.3 % of GDP), but it would be corrected significantly in 2023 (to 3.9 % of GDP) given the expected slowdown in domestic demand. Despite favorable terms of trade, the high external imbalance that would occur during 2022 would be largely due to domestic demand growth, cost pressures associated with high freight rates, higher external debt service payments, and good performance in terms of the profits of foreign companies.2 By 2023, the adjustment in domestic demand would be reflected in a smaller current account deficit especially due to fewer imports, a global moderation in prices and cost pressures, and a reduction in profits remitted abroad by companies with foreign direct investment (FDI) focused on the local market. Despite this anticipated correction in the external imbalance, its level as a percentage of GDP would remain high in the context of tight financial conditions. In the world's main economies, inflation forecasts and expectations point to a reduction by 2023, but at levels that still exceed their central banks' targets. The path anticipated for the Federal Reserve (Fed) interest rate increased and the forecast for global growth continues to be moderate. In the fourth quarter of 2022, logistics costs and international prices for some foods, oil and energy declined from elevated levels, bringing downward pressure to bear on global inflation. Meanwhile, the higher cost of financing, the loss of real income due to high levels of global inflation, and the persistence of the war in Ukraine, among other factors, have contributed to the reduction in global economic growth forecasts. In the United States, inflation turned out to be lower than estimated and the members of the Federal Open Market Committee (FOMC) reduced the growth forecast for 2023. Nevertheless, the actual level of inflation in that country, its forecasts, and expectations exceed the target. Also, the labor market remains tight, and fiscal policy is still expansionary. In this environment, the Fed raised the expected path for policy interest rates and, with this, the market average estimates higher levels for 2023 than those forecast in October. In the region's emerging economies, country risk premia declined during the quarter and the currencies of those countries appreciated against the US dollar. Considering all the above, for the current year, the Central Bank's technical staff increased the path estimated for the Fed's interest rate, reduced the forecast for growth in the country's external demand, lowered the expected path of oil prices, and kept the country’s risk premium assumption high, but at somewhat lower levels than those anticipated in the previous Monetary Policy Report. Moreover, accumulated inflationary pressures originating from the behavior of the exchange rate would continue to be important. External financial conditions facing the economy have improved recently and could be associated with a more favorable international context for the Colombian economy. So far this year, there has been a reduction in long-term bond interest rates in the markets of developed countries and an increase in the prices of risky assets, such as stocks. This would be associated with a faster-than-expected reduction in inflation in the United States and Europe, which would allow for a less restrictive course for monetary policy in those regions. In this context, the risks of a global recession have been reduced and the global appetite for risk has increased. Consequently, the risk premium continues to decline, the Colombian peso has appreciated significantly, and TES interest rates have decreased. Should this trend consolidate, exchange rate inflationary pressures could be less than what was incorporated into the macroeconomic forecast. Uncertainty about external forecasts and their impact on the country remains high, given the unpredictable course of the war in Ukraine, geopolitical tensions, local uncertainty, and the extensive financing needs of the Colombian government and the economy. High inflation with forecasts and expectations above 3.0%, coupled with surplus demand and a tight labor market are compatible with a contractionary stance on monetary policy that is conducive to the macroeconomic adjustment needed to mitigate the risk of de-anchoring inflation expectations and to ensure that inflation converges to the target. Compared to the forecasts in the October edition of the Monetary Policy Report, domestic demand has been more dynamic, with a higher observed level of output exceeding the productive capacity of the economy. In this context of surplus demand, headline and core inflation continued to trend upward and posted surprising increases. Observed and expected international interest rates increased, the country’s risk premia lessened (but remains at high levels), and accumulated exchange rate pressures are still significant. The technical staff's inflation forecast for 2023 increased and inflation expectations remain well above 3.0%. All in all, the risk of inflation expectations becoming unanchored persists, which would accentuate the generalized indexation process and push inflation even further away from the target. This macroeconomic context requires consolidating a contractionary monetary policy stance that aims to meet the inflation target within the forecast horizon and bring the economy's output to levels closer to its potential. 1.2 Monetary Policy Decision At its meetings in December 2022 and January 2023, Banco de la República’s Board of Directors (BDBR) agreed to continue the process of normalizing monetary policy. In December, the BDBR decided by a majority vote to increase the monetary policy interest rate by 100 basis points (bps) and in its January meeting by 75 bps, bringing it to 12.75% (Graph 1.5). 1/ Seasonally and calendar adjusted. 2/ In the current account aggregate, the pressures for a higher external deficit come from those companies with FDI that are focused on the domestic market. In contrast, profits in the mining and energy sectors are more than offset by the external revenue they generate through exports. Box 1 - Electricity Rates: Recent Developments and Indexation. Author: Édgar Caicedo García, Pablo Montealegre Moreno and Álex Fernando Pérez Libreros Box 2 - Indicators of Household Indebtedness. Author: Camilo Gómez y Juan Sebastián Mariñ

Informe de Política Monetaria - Octubre 2020

Recent data suggest that the technical staff’s appraisals of the condition and development of economic activity, inflation and the labor market have been in line with current trends, marked by a decline in demand and the persistence of ample excess productive capacity. A significant projected fall in output materialized in the second quarter, contributing to a decline in inflation below the 3% target and reflected in a significant deterioration of the labor market. A slow recovery in output and employment is expected to continue for the remainder of 2020 and into next year, alongside growing inflation that should remain below the target. The Colombian economy is likely to undergo a significant recession in 2020 (GDP contraction of 7.6%), though this may be less severe than projected in the previous report (-8.5%). Output is expected to have begun a slow recovery in the second half of this year, though it is not projected to return to pre-pandemic levels in 2021 amid significant global uncertainty. The output decline in the first half of 2020 was less severe than anticipated, thanks to an upward revision in first-quarter GDP and a smaller contraction in the second quarter (-15.5%) than had been projected (-16.5%). Available economic indicators suggest an annual decline in GDP in the third quarter of around 9%. No significant acceleration of COVID-19 cases that would imply a tightening of social distancing measures is presumed for the remainder of this year or in 2021. In that context, a gradual opening of the economy would be expected to continue, with supply in sectors that have been most affected by the pandemic recovering slowly as restrictions on economic activity continue to be relaxed. On the spending side, an improvement in consumer confidence, suppressed demand for goods and services, low interest rates, and higher expected levels of foreign demand should contribute to a recovery in output. A low base of comparison would also help explain the expected increase in GDP in 2021. Based on the conditions laid out above, economic growth in 2020 is expected to be between -9% and -6.5%, with a central value of -7.6%. Growth in 2021 is projected to be between 3% and 7%, with a central value of 4.6% (Graph 1.1). Upward revisions compared to the July report take into account a lower-than-expected fall in first-semester growth and a somewhat faster recovery in the third quarter in some sectors. The forecast intervals for 2020 and 2021 growth tightened somewhat but continue to reflect a high degree of uncertainty over theevolution of the pandemic, the easures required to deal with it, and their effects on global and domestic economic activity.Box 1. Evaluation of the Predictive Capacity of Expected Inflation Measures. Authors: César Anzola-Bravo, Anderson Grajales-Olarte, Alexander Guarín-López, Julián Camilo Mateus-Gamboa, Jonathan Alexander Muñoz-Martínez, Carlos Andrés Quicazán-Moreno, Juan Sebastián Rojas-Moreno, Cristhian Hernando Ruiz-CardozoBox 2. Literature Review: Weighing the Drivers of Portfolio Flows to Emerging Market Economies. Authors: Andrés Sánchez-Jabb

Monetary Policy Report - January 2021

Macroeconomic Summary Overall inflation (1.61%) and core inflation (excluding food and regulated items) (1.11%) both declined beyond the technical staff’s expectations in the fourth quarter of 2020. Year-end 2021 forecasts for both indicators were revised downward to 2.3% and 2.1%, respectively. Market inflation expectations also fell over this period and suggested inflation below the 3% target through the end of this year, rising to the target in 2022. Downward pressure on inflation was more significant in the fourth quarter than previously projected, indicating weak demand. Annual deceleration among the main groups of the consumer price index (CPI) was generalized and, except for foods, was greater than projected in the October report. The CPI for goods (excluding foods and regulated items) and the CPI for regulated items were subject to the largest decelerations and forecasting discrepancies. In the first case, this was due in part to a greater-than-expected effect on prices from the government’s “VAT-fee day” amid weak demand, and from the extension of some price relief measures. For regulated items, the deceleration was caused in part by unanticipated declines in some utility prices. Annual change in the CPI for services continued to decline as a result of the performance of those services that were not subject to price relief measures, in particular. Although some of the overall decline in inflation is expected to be temporary and reverse course in the second quarter of 2021, various sources of downward pressure on inflation have become more acute and will likely remain into next year. These include ample excesses in capacity, as suggested by the continued and greater-than-expected deceleration in core inflation indicators and in the CPI for services excluding price relief measures. This dynamic is also suggested by the minimal transmission of accumulated depreciation of the peso on domestic prices. Although excess capacity should fall in 2021, the decline will likely be slower than projected in the October report amid additional restrictions on mobility due to a recent acceleration of growth in COVID-19 cases. An additional factor is that low inflation registered at the end of 2020 will likely be reflected in low price adjustments on certain indexed services with significant weight in the CPI, including real estate rentals and some utilities. These factors should keep inflation below the target and lower than estimates from the previous report on the forecast horizon. Inflation is expected to continue to decline to levels near 1% in March, later increasing to 2.3% at the end of 2021 and 2.7% at year-end 2022 (Graph 1.1). According to the Bank’s most recent survey, market analysts expect inflation of 2.7% and 3.1% in December 2021 and 2022, respectively. Expected inflation derived from government bonds was 2% for year-end 2021, while expected inflation based on bonds one year forward from that date (FBEI 1-1 2022) was 3.2%.Box I. Macroeconomic Expectations: Analysis of the Monthly Survey of Economic Analyst Expectations. Authors: Hernando Vargas, Alexander Guarín, Anderson Grajales, César Anzola, Jonathan Muño

Monetary Policy Report - April de 2021

1.1 Macroeconomic summary Economic recovery has consistently outperformed the technical staff’s expectations following a steep decline in activity in the second quarter of 2020. At the same time, total and core inflation rates have fallen and remain at low levels, suggesting that a significant element of the reactivation of Colombia’s economy has been related to recovery in potential GDP. This would support the technical staff’s diagnosis of weak aggregate demand and ample excess capacity. The most recently available data on 2020 growth suggests a contraction in economic activity of 6.8%, lower than estimates from January’s Monetary Policy Report (-7.2%). High-frequency indicators suggest that economic performance was significantly more dynamic than expected in January, despite mobility restrictions and quarantine measures. This has also come amid declines in total and core inflation, the latter of which was below January projections if controlling for certain relative price changes. This suggests that the unexpected strength of recent growth contains elements of demand, and that excess capacity, while significant, could be lower than previously estimated. Nevertheless, uncertainty over the measurement of excess capacity continues to be unusually high and marked both by variations in the way different economic sectors and spending components have been affected by the pandemic, and by uneven price behavior. The size of excess capacity, and in particular the evolution of the pandemic in forthcoming quarters, constitute substantial risks to the macroeconomic forecast presented in this report. Despite the unexpected strength of the recovery, the technical staff continues to project ample excess capacity that is expected to remain on the forecast horizon, alongside core inflation that will likely remain below the target. Domestic demand remains below 2019 levels amid unusually significant uncertainty over the size of excess capacity in the economy. High national unemployment (14.6% for February 2021) reflects a loose labor market, while observed total and core inflation continue to be below 2%. Inflationary pressures from the exchange rate are expected to continue to be low, with relatively little pass-through on inflation. This would be compatible with a negative output gap. Excess productive capacity and the expectation of core inflation below the 3% target on the forecast horizon provide a basis for an expansive monetary policy posture. The technical staff’s assessment of certain shocks and their expected effects on the economy, as well as the presence of several sources of uncertainty and related assumptions about their potential macroeconomic impacts, remain a feature of this report. The coronavirus pandemic, in particular, continues to affect the public health environment, and the reopening of Colombia’s economy remains incomplete. The technical staff’s assessment is that the COVID-19 shock has affected both aggregate demand and supply, but that the impact on demand has been deeper and more persistent. Given this persistence, the central forecast accounts for a gradual tightening of the output gap in the absence of new waves of contagion, and as vaccination campaigns progress. The central forecast continues to include an expected increase of total and core inflation rates in the second quarter of 2021, alongside the lapse of the temporary price relief measures put in place in 2020. Additional COVID-19 outbreaks (of uncertain duration and intensity) represent a significant risk factor that could affect these projections. Additionally, the forecast continues to include an upward trend in sovereign risk premiums, reflected by higher levels of public debt that in the wake of the pandemic are likely to persist on the forecast horizon, even in the context of a fiscal adjustment. At the same time, the projection accounts for the shortterm effects on private domestic demand from a fiscal adjustment along the lines of the one currently being proposed by the national government. This would be compatible with a gradual recovery of private domestic demand in 2022. The size and characteristics of the fiscal adjustment that is ultimately implemented, as well as the corresponding market response, represent another source of forecast uncertainty. Newly available information offers evidence of the potential for significant changes to the macroeconomic scenario, though without altering the general diagnosis described above. The most recent data on inflation, growth, fiscal policy, and international financial conditions suggests a more dynamic economy than previously expected. However, a third wave of the pandemic has delayed the re-opening of Colombia’s economy and brought with it a deceleration in economic activity. Detailed descriptions of these considerations and subsequent changes to the macroeconomic forecast are presented below. The expected annual decline in GDP (-0.3%) in the first quarter of 2021 appears to have been less pronounced than projected in January (-4.8%). Partial closures in January to address a second wave of COVID-19 appear to have had a less significant negative impact on the economy than previously estimated. This is reflected in figures related to mobility, energy demand, industry and retail sales, foreign trade, commercial transactions from selected banks, and the national statistics agency’s (DANE) economic tracking indicator (ISE). Output is now expected to have declined annually in the first quarter by 0.3%. Private consumption likely continued to recover, registering levels somewhat above those from the previous year, while public consumption likely increased significantly. While a recovery in investment in both housing and in other buildings and structures is expected, overall investment levels in this case likely continued to be low, and gross fixed capital formation is expected to continue to show significant annual declines. Imports likely recovered to again outpace exports, though both are expected to register significant annual declines. Economic activity that outpaced projections, an increase in oil prices and other export products, and an expected increase in public spending this year account for the upward revision to the 2021 growth forecast (from 4.6% with a range between 2% and 6% in January, to 6.0% with a range between 3% and 7% in April). As a result, the output gap is expected to be smaller and to tighten more rapidly than projected in the previous report, though it is still expected to remain in negative territory on the forecast horizon. Wide forecast intervals reflect the fact that the future evolution of the COVID-19 pandemic remains a significant source of uncertainty on these projections. The delay in the recovery of economic activity as a result of the resurgence of COVID-19 in the first quarter appears to have been less significant than projected in the January report. The central forecast scenario expects this improved performance to continue in 2021 alongside increased consumer and business confidence. Low real interest rates and an active credit supply would also support this dynamic, and the overall conditions would be expected to spur a recovery in consumption and investment. Increased growth in public spending and public works based on the national government’s spending plan (Plan Financiero del Gobierno) are other factors to consider. Additionally, an expected recovery in global demand and higher projected prices for oil and coffee would further contribute to improved external revenues and would favor investment, in particular in the oil sector. Given the above, the technical staff’s 2021 growth forecast has been revised upward from 4.6% in January (range from 2% to 6%) to 6.0% in April (range from 3% to 7%). These projections account for the potential for the third wave of COVID-19 to have a larger and more persistent effect on the economy than the previous wave, while also supposing that there will not be any additional significant waves of the pandemic and that mobility restrictions will be relaxed as a result. Economic growth in 2022 is expected to be 3%, with a range between 1% and 5%. This figure would be lower than projected in the January report (3.6% with a range between 2% and 6%), due to a higher base of comparison given the upward revision to expected GDP in 2021. This forecast also takes into account the likely effects on private demand of a fiscal adjustment of the size currently being proposed by the national government, and which would come into effect in 2022. Excess in productive capacity is now expected to be lower than estimated in January but continues to be significant and affected by high levels of uncertainty, as reflected in the wide forecast intervals. The possibility of new waves of the virus (of uncertain intensity and duration) represents a significant downward risk to projected GDP growth, and is signaled by the lower limits of the ranges provided in this report. Inflation (1.51%) and inflation excluding food and regulated items (0.94%) declined in March compared to December, continuing below the 3% target. The decline in inflation in this period was below projections, explained in large part by unanticipated increases in the costs of certain foods (3.92%) and regulated items (1.52%). An increase in international food and shipping prices, increased foreign demand for beef, and specific upward pressures on perishable food supplies appear to explain a lower-than-expected deceleration in the consumer price index (CPI) for foods. An unexpected increase in regulated items prices came amid unanticipated increases in international fuel prices, on some utilities rates, and for regulated education prices. The decline in annual inflation excluding food and regulated items between December and March was in line with projections from January, though this included downward pressure from a significant reduction in telecommunications rates due to the imminent entry of a new operator. When controlling for the effects of this relative price change, inflation excluding food and regulated items exceeds levels forecast in the previous report. Within this indicator of core inflation, the CPI for goods (1.05%) accelerated due to a reversion of the effects of the VAT-free day in November, which was largely accounted for in February, and possibly by the transmission of a recent depreciation of the peso on domestic prices for certain items (electric and household appliances). For their part, services prices decelerated and showed the lowest rate of annual growth (0.89%) among the large consumer baskets in the CPI. Within the services basket, the annual change in rental prices continued to decline, while those services that continue to experience the most significant restrictions on returning to normal operations (tourism, cinemas, nightlife, etc.) continued to register significant price declines. As previously mentioned, telephone rates also fell significantly due to increased competition in the market. Total inflation is expected to continue to be affected by ample excesses in productive capacity for the remainder of 2021 and 2022, though less so than projected in January. As a result, convergence to the inflation target is now expected to be somewhat faster than estimated in the previous report, assuming the absence of significant additional outbreaks of COVID-19. The technical staff’s year-end inflation projections for 2021 and 2022 have increased, suggesting figures around 3% due largely to variation in food and regulated items prices. The projection for inflation excluding food and regulated items also increased, but remains below 3%. Price relief measures on indirect taxes implemented in 2020 are expected to lapse in the second quarter of 2021, generating a one-off effect on prices and temporarily affecting inflation excluding food and regulated items. However, indexation to low levels of past inflation, weak demand, and ample excess productive capacity are expected to keep core inflation below the target, near 2.3% at the end of 2021 (previously 2.1%). The reversion in 2021 of the effects of some price relief measures on utility rates from 2020 should lead to an increase in the CPI for regulated items in the second half of this year. Annual price changes are now expected to be higher than estimated in the January report due to an increased expected path for fuel prices and unanticipated increases in regulated education prices. The projection for the CPI for foods has increased compared to the previous report, taking into account certain factors that were not anticipated in January (a less favorable agricultural cycle, increased pressure from international prices, and transport costs). Given the above, year-end annual inflation for 2021 and 2022 is now expected to be 3% and 2.8%, respectively, which would be above projections from January (2.3% and 2,7%). For its part, expected inflation based on analyst surveys suggests year-end inflation in 2021 and 2022 of 2.8% and 3.1%, respectively. There remains significant uncertainty surrounding the inflation forecasts included in this report due to several factors: 1) the evolution of the pandemic; 2) the difficulty in evaluating the size and persistence of excess productive capacity; 3) the timing and manner in which price relief measures will lapse; and 4) the future behavior of food prices. Projected 2021 growth in foreign demand (4.4% to 5.2%) and the supposed average oil price (USD 53 to USD 61 per Brent benchmark barrel) were both revised upward. An increase in long-term international interest rates has been reflected in a depreciation of the peso and could result in relatively tighter external financial conditions for emerging market economies, including Colombia. Average growth among Colombia’s trade partners was greater than expected in the fourth quarter of 2020. This, together with a sizable fiscal stimulus approved in the United States and the onset of a massive global vaccination campaign, largely explains the projected increase in foreign demand growth in 2021. The resilience of the goods market in the face of global crisis and an expected normalization in international trade are additional factors. These considerations and the expected continuation of a gradual reduction of mobility restrictions abroad suggest that Colombia’s trade partners could grow on average by 5.2% in 2021 and around 3.4% in 2022. The improved prospects for global economic growth have led to an increase in current and expected oil prices. Production interruptions due to a heavy winter, reduced inventories, and increased supply restrictions instituted by producing countries have also contributed to the increase. Meanwhile, market forecasts and recent Federal Reserve pronouncements suggest that the benchmark interest rate in the U.S. will remain stable for the next two years. Nevertheless, a significant increase in public spending in the country has fostered expectations for greater growth and inflation, as well as increased uncertainty over the moment in which a normalization of monetary policy might begin. This has been reflected in an increase in long-term interest rates. In this context, emerging market economies in the region, including Colombia, have registered increases in sovereign risk premiums and long-term domestic interest rates, and a depreciation of local currencies against the dollar. Recent outbreaks of COVID-19 in several of these economies; limits on vaccine supply and the slow pace of immunization campaigns in some countries; a significant increase in public debt; and tensions between the United States and China, among other factors, all add to a high level of uncertainty surrounding interest rate spreads, external financing conditions, and the future performance of risk premiums. The impact that this environment could have on the exchange rate and on domestic financing conditions represent risks to the macroeconomic and monetary policy forecasts. Domestic financial conditions continue to favor recovery in economic activity. The transmission of reductions to the policy interest rate on credit rates has been significant. The banking portfolio continues to recover amid circumstances that have affected both the supply and demand for loans, and in which some credit risks have materialized. Preferential and ordinary commercial interest rates have fallen to a similar degree as the benchmark interest rate. As is generally the case, this transmission has come at a slower pace for consumer credit rates, and has been further delayed in the case of mortgage rates. Commercial credit levels stabilized above pre-pandemic levels in March, following an increase resulting from significant liquidity requirements for businesses in the second quarter of 2020. The consumer credit portfolio continued to recover and has now surpassed February 2020 levels, though overall growth in the portfolio remains low. At the same time, portfolio projections and default indicators have increased, and credit establishment earnings have come down. Despite this, credit disbursements continue to recover and solvency indicators remain well above regulatory minimums. 1.2 Monetary policy decision In its meetings in March and April the BDBR left the benchmark interest rate unchanged at 1.75%.Box 1. The Transmission of Changes in the Monetary Policy Interest Rate (MPR) to Credit Institutions’ Interest Rates (CI). Authors: Isleny Carranza Amortegui, Deicy Cristiano Botia, Eliana González Molano, Carlos Huertas CamposBox 2. Analysis of Macroeconomic Expectations implicit in Financial Market Instruments. Authors: Hernando Vargas, Alexander Guarín, Anderson Grajales-Olarte, Jonathan Muño

Monetary Policy Report - July de 2021

Macroeconomic summary The Colombian economy sustained numerous shocks in the second quarter, pri¬marily related to costs and supply. The majority of these shocks were unantic¬ipated or proved more persistent than expected, interrupting the recovery in economic activity observed at the beginning of the year and pushing overall inflation above the target. Core inflation (excluding food and regulated items) increased but remained low, in line with the technical staff’s expectations. A third wave of the pandemic, which became more severe and prolonged than the previous outbreak, began in early April. This had both a high cost in terms of human life and a negative impact on Colombia's economic recovery. Between May and mid-June roadblocks and other disruptions to public order had a sig¬nificant negative effect on economic activity and inflation. The combination and magnitude of these two shocks likely led to a decline in gross domestic product (GDP) compared to the first quarter. Roadblocks also led to a significant in¬crease in food prices. The accumulated effects of global disruptions to certain value chains and increased international freight transportation prices, which since the end of 2020 have restricted supply and increased costs, also affected Colombia’s economy. The factors described above, which primarily affected the consumer price index (CPI) for goods and foods, explain to a significant degree the technical staff’s forecast errors and the increase in overall inflation above the 3% target. By contrast, increases in core inflation and in prices for regulated items were in line with the technical staff’s expectations, and can be explained largely by the elimination of various price relief measures put in place last year. An increase in perceived sovereign risk and the upward pressures that this im¬plies on international financing costs and the exchange rate were further con¬siderations. Despite significant negative shocks, economic growth in the first half of the year (9.1%) is now expected to be significantly higher than projected in the April re¬port (7.1%), a sign of a more dynamic economy that could recover more quickly than previously forecast. Diverse economic activity figures have indicated high¬er-than-expected growth since the end of 2020. This suggests that the negative effects on output from recurring waves of COVID-19 have grown weaker and less long-lasting with subsequent outbreaks. Nevertheless, the third wave of the coro¬navirus, and to an even greater degree the previously mentioned roadblocks and disruptions to public order, likely led to a decline in GDP in the second quar¬ter compared to the first. Despite this, data from the monthly economic tracking indicator (ISE) for April and May surpassed expectations, and new sector-level measures of economic activity suggest that the negative impact of the pandemic on output continues to moderate, amid reduced restrictions on mobility and im¬provements in the pace of vaccination programs. Freight transportation registers (June) and unregulated energy demand (July), among other indicators, suggest a significant recovery following the roadblocks in May. Given the above, annual GDP growth in the second quarter is expected to have been around 17.3% (previously 15.8%), explained in large part by a low basis of comparison. The technical staff revised its growth projection for 2021 upward from 6% to 7.5%. This forecast, which comes with an unusually high degree of uncertain¬ty, assumes no additional disruptions to public order and that any new waves of COVID-19 will not have significant additional negative effects on economic activity. Recovery in international demand, price levels for some of Colombia’s export com¬modities, and remittances from workers abroad have all performed better than projected in the previous report. This dynamic is expected to continue to drive recovery in the national income over the rest of the year. Continued ample international liquidity, an acceleration in vacci¬nation programs, and low interest rates can also be ex¬pected to favor economic activity. Improved performance in the second quarter, which led to an upward growth revision for all components of spending, is expected to continue, with the economy returning to 2019 production levels at the end of 2021, earlier than estimated in the April report. This forecast continues to account for the short-term effects on aggregate demand of a tax reform package along the lines of what is currently being pro-posed by the national government. Given the above, the central forecast scenario in this report projects growth in 2021 of 7.5% and in 2022 of 3.1% (Graph 1.1). In this scenar¬io, economic activity would nonetheless remain below potential. The noted improvement in these projections comes with a high degree of uncertainty. Annual inflation increased more than expected in June (3.63%) as a result of changes in food prices, while growth in core inflation (1.87%) was similar to projections. The in¬creased CPI for foods would be expected to persist for the remainder of the year, contributing to inflation remaining above the target. Overall and core inflation would be ex¬pected to return to close to 3% at the end of 2022, amid a deceleration in growth in the CPI for foods and reduced ex¬cess productive capacity. Recent increases in international freight and agricultural goods prices, as well as the live¬stock cycle and increased meat exports, have exerted up¬ward pressure on food prices, primarily in processed foods (see Box 21). In addition to these persistent factors affecting prices, national roadblocks and related disruptions to pub¬lic order in several cities throughout May and parts of June were reflected in a significant restriction of supply and an unexpected annual increase in the CPI for foods (8.52%). Inflation in regulated items (5.93%) also accelerated, due to a low basis of comparison on gasoline prices and the par¬tial lapse of relief measures on utility rates that were put in place in 2020. Inflation excluding food and regulated items recovered in line with projections to 1.87%, due to the rein¬statement of indirect taxes on certain goods and services that had been temporarily eliminated in 2020, and to up¬ward pressures exerted by prices for foods away from home (FAH), among other factors. The increase in perishable foods prices is expected to be reversed over the course of the year, assuming an absence of additional, long-lasting blockades of national roads. Increased processed food pric¬es would be expected to persist and contribute to keeping inflation above the target at the end of the year. Inflation excluding foods and regulated items is expected to contin¬ue to exhibit an upward trend, as excesses in productive ca¬pacity continue to close, and register a temporary increase in March 2022 largely due to the reinstatement of the FAH consumption tax. Given the above, overall year-end infla¬tion is expected to be 4.1% in 2021 and 3.1% in 2022 (Graph 1.2), and core inflation is expected to be 2.6% in 2021 and 3.2% in 2022 (Graph 1.3). The technical staff has interpreted the overall behavior of prices in the CPI excluding food and regulated items, alongside continued unexpected increases in economic activity, as signs of more ample excess productive capaci¬ty in the economy. This would be expected to persist over the next two years, with the output gap closing at the end of that period. Increased economic growth suggests a less negative output gap than estimated last quarter. Nevertheless, the behavior of core inflation, especially in services, suggests that potential GDP has recovered to an unanticipated degree and that ample excess capacity con¬tinues, with a persistent effect on aggregate demand. La¬bor market observation supports this interpretation, with persistent high levels of unemployment and stagnation in the recovery of jobs lost as a result of the pandemic. Increased inflation can be explained largely by shocks re¬lated to costs and supply, and by the dissolution of some price relief measures put in place in 2020. The growth and inflation forecasts described above would be consistent with a less negative output gap closing more quickly across the forecast horizon compared to the projection from the April report. Nevertheless, uncertainty surrounding excess capacity is very high and constitutes a risk to the forecast (Graphic 1.4). The fiscal accounts outlook deteriorated, Standard and Poor’s Global Ratings (S&P) and Fitch Ratings (Fitch) down¬graded Colombia’s credit rating, roadblocks and disrup¬tions to public order affected output, and the country faced a third wave of COVID-19 that was more severe and prolonged than the previous outbreak. These factors were reflected in an increased risk premium and depreciation of the peso compared to the dollar. This occurred in a favor¬able context in regard to foreign income, as international prices for oil, coffee, and other Colombian export goods in¬creased. This contributed to a recovery in the terms of trade and in the national income and mitigated upward pres¬sures on the risk premium and the exchange rate. Expected oil prices in this report are USD 68 per barrel (previous¬ly USD 61/bl) for 2021 and USD 66/bl (previously USD 60/ bl) for 2022. This increased trajectory shows convergence to oil prices below recently observed levels, as a result of increased global supply that would more than offset increased demand. As a result, the recent price increase is expected to be temporary. International financial conditions are expected to become somewhat less fa¬vorable in the current macroeconomic context, despite the improvement in foreign income due to increased demand and some higher prices for oil and other export products. Growth in foreign demand was better than expected in the previous report, with projections for 2021 and 2022 increasing from 5.2% to 6.0% and from 3.4% to 3.5%, respectively. For the year to date, figures for economic activity suggest more dynamic foreign demand than previously expected. Output recovery has been faster in the United States and China than in Latin America, as economic reactivation in the latter has been limit¬ed by outbreaks of COVID-19, restricted vaccine supplies, and a lack of fiscal space to confront the pandemic, among other factors. The positive dynamic in foreign goods trade has come amid a deterioration in value chains and a significant increase in commodities and freight prices (see Box 3). Inflation in the United States has been unexpectedly high, with observed and expected values remaining above the target, while growth forecasts have been revised upward. As a result, the beginning of a normalization in monetary policy in the U.S. could come earlier than previously projected. This report estimates that the U.S. Federal Reserve’s first rate increase will come at the end of 2022 (before the first quarter of 2023). Colombia’s risk premium is projected to be higher than forecast in the April report, and is expected to remain on a growth trajectory given the country’s accumulation of public and external debt. This would be expected to contribute to an increase in international financing costs on the forecast horizon. An expansionary monetary policy stance continues to support favorable do¬mestic financing conditions. The interbank rate and the reference banking indi¬cator (IBR)remained consistent with the policy interest rate in the second quar¬ter. Average deposit and credit rates continued at historical lows, despite some observed increases at the end of June. The peso-denominated credit portfolio continued to decelerate in annual terms and, between March and June, growth in the household credit portfolio accelerated, primarily related to housing pur¬chases. Disbursements and recovery in the commercial credit portfolio were significant, returning to high levels observed one year ago, when businesses required significant levels of liquidity to confront the economic effects of the pandemic. Meanwhile, credit risk increased, liability provisions remained high, and some banks withdrew from the balance of their past-due portfolios. Nev¬ertheless, financial system earnings have recovered, and liquidity and solvency levels remain above regulatory minimums. Beginning with this report, a new methodology will be used to quantify and communicate the uncertainty surrounding central macroeconomic fore¬casts in the context of an active monetary policy. The new methodology, known as predictive densities (PD), will be explained in detail in Box 1. PD methodology provides probability distributions of the main forecast vari¬ables (e.g. growth, inflation) based on the balance of risks of key factors that, in the technical staff’s judgment, could affect the economy on the forecast horizon. These distributions reflect the result of possible shocks (to external variables, prices, and economic activity) that the economy could sustain and the transmission effects considering Colombia’s economic structure and anticipated monetary policy responses. As a result, PD allows for the quantification of uncertainty around the central forecast and of its bias. In this report, the PD exercise shows a downward bias for both economic growth and output gap, while the op¬posite is shown for headline inflation (Graphs 1.1, 1.2 and 1.3). The balance of risks indicates more complex mone¬tary policy dilemmas than previously expected. The most significant anticipated risk regarding external financing would be a return to less favorable conditions in a sce¬nario in which the U.S. Federal Reserve promptly raises interest rates. Such a decision could come as the result of current levels of economic growth and higher-than-ex¬pected employment generating significant inflationary pressures on that country. Uncertainty regarding Colom¬bia’s fiscal outlook and the subsequent effects on the risk premium and external financing costs represent addi¬tional considerations. The risks to economic growth are mainly downside risks, relating especially to the effects of political and fiscal uncertainty on consumption and investment decisions and the potential for additional waves of COVID-19 and the subsequent effects on eco-nomic activity. Inflation risks take into account the po¬tential for more persistent shocks associated with dis¬ruption to value chains, higher international commodity and food prices, and a slower-than-expected recovery in the national agricultural chain as a result of the recent roadblocks. These would represent upward risks primarily to food and goods prices. The main downside risk to the inflation forecast would come from an increase in rental housing prices below the central scenario projection. This would be explained by weak demand and increased sup¬ply in 2022 as a result of high observed housing sales this year. All told, the PD exercise reveals a downward bias for economic growth forecast, with 90% probability of growth between 6.1% and 9.1% for 2021 and between 0.5% and 4.1% in 2022. The output gap also exhibits a downward bias to the central forecast scenario, primarily in 2022. On the contrary, an upward bias is expected for headline inflation forecast, with 90% probability ranging between 3.7% and 4.9% in 2021 and between 2.2% and 4.7% in 2022. 1.2 Monetary policy decision In its meetings in June and July the BDBR left the bench¬mark interest rate unchanged at 1.75% (Graph 1.5).Box 1. Characterizing and Communicating the Balance of Risks of Macroeconomic Forecasts: A Predictive Densities Approach for Colombia Authors: Juan Camilo Méndez-Vizcaíno, César Ánzola-Bravo, Alexander Guarín y Anderson Grajales-OlarteBox 2. Analysis of Recent Disturbances in Global Logistics Chains and their Impact on Colombian Import Markets. Authors: Aarón Garavito, Juan Diego Cortés, Stefany Andrea Moreno, Alex Fernando Pérez y Juan Esteban CarranzaBox 3. The Upward Dynamics of Food Prices. Authors: Edgar Caicedo G., Andrea Salazar D. y Jesús Daniel Sarmiento S