Colombia Surprises Markets with 100-Basis-Point Rate Hike to 10.25%

The Central Bank of Colombia shocked financial markets on Friday by raising its key interest rate by 100 basis points to 10.25%, marking the first hike in nearly three years and exceeding the expectations of most analysts. 

The move comes amid rising inflationary pressures, sharply elevated price expectations, and increasing domestic and external financial risks.

In a statement, the central bank said the decision was passed by a divided board of seven members: four supported the 100-basis-point increase, two favored a 50-basis-point cut, and one advocated keeping the rate unchanged.

A Reuters survey had indicated that 15 out of 26 economists expected a 50-basis-point increase to 9.75%, while only one anticipated a 100-point hike. 

The central bank highlighted that annual inflation reached 5.1% in December, slightly lower than end-2024 levels, but core inflation rose to 5.02% from 4.85% in November, exceeding the bank’s target of 3% ±1%.

President Gustavo Petro recently approved a 22.7% increase in the minimum wage for 2026, a measure expected to contribute to higher domestic prices. Analysts surveyed by Reuters forecast that inflation could hit 6.32% by year-end.

Central Bank President Leonardo Villar noted during a press conference that the technical team revised its inflation forecast for 2026 to 6.3%, up from a previous estimate of 4.1%. Economic growth reached 2.9% in 2025, but is expected to slow to 2.6% in 2026.

The bank also warned of a widening current account deficit, which reached 2.4% of GDP in 2025, up from 1.6% in 2024, driven by strong import growth against limited export expansion. External uncertainties were cited, including trade disputes, U.S. immigration policies, geopolitical tensions, and perceptions of sovereign risk for Colombia.

Finance Minister Germán Ávila, representing the government on the board, strongly opposed the decision, arguing that Colombia’s growth trajectory remains sustainable and that higher rates could dampen consumption. President Petro has repeatedly called for lower interest rates to support economic expansion.