Oil price shock and peso depreciation

Colombia's terms of trade deteriorated by close to 70 percent between the third quarter of 2014 and the first quarter of 2016 as global oil prices collapsed, hitting an economy where petroleum accounted for a large share of export earnings and fiscal revenue. The peso depreciated 39.4 percent against the dollar between July 2014 and March 2015 alone, moving from an average of about 1,858 to 2,591 pesos per dollar, and kept sliding to a peak above 3,400 by February 2016, roughly a 90 percent cumulative depreciation from mid-2014 levels. Banco de la República's own inflation reports trace how this currency pass-through, combined with a nationwide trucking strike and an El Niño-driven drought that pushed up food prices, drove annual consumer inflation from near 3.0 percent in 2014 to a peak of 8.97 percent in July 2016. Despite weak growth, the central bank raised its benchmark interest rate repeatedly through this period, including a 25-basis-point hike in December 2015, prioritizing the credibility of its inflation target over near-term output support as the peso absorbed most of the terms-of-trade shock.