The 1999 crisis and the shift to inflation targeting

Colombia's economy contracted by 4.2 percent in 1999, its deepest recession in decades, after Banco de la República spent much of the 1990s trying to simultaneously defend both a pre-announced inflation target and an exchange-rate band, a combination the bank's own historical review concluded was unsustainable once capital flows reversed. As the recession deepened, annual inflation actually fell to 9.2 percent by the end of 1999, comfortably below the 15 percent target set for that year, demonstrating that the economy could disinflate through sheer contraction rather than through credible policy design. In September 1999, Banco de la República abandoned the exchange-rate bands entirely, letting the peso float freely, and by the end of that year it announced a new framework, the Inflation Targeting Plan, adopted at almost the same time as Brazil and Chile moved to similar regimes. This marked the definitive end of Colombia's exchange-rate anchor era and set the template, floating currency plus an explicit inflation target, that would guide the central bank's response to every major shock in the following decades, including the oil-price collapse of 2014-16.