Good afternoon, welcome to a new live broadcast from the Bank of the Republic. In the next few minutes, the entity's technical manager , Dr. Hernando Vargas, will present the recent monetary policy report for the month of January published this week on our website. Once Dr. Vargas finishes the presentation, we will open the different channels so that journalists and analysts can ask us their questions. Good afternoon, Dr. Hernando. Go ahead with your presentation. Thank you, Jaime, and good afternoon to everyone joining us for the presentation of this January 2026 monetary policy report. Let's remember that this is a projection exercise of the country's main macroeconomic variables over a two-year horizon, conditioned on assumptions and projections of external economic variables, an assessment of the current state of the economy, and monetary policy behavior that ensures inflation remains at or converges to the 3% target and that the economy operates or converges to operate at full capacity. This is an exercise by the bank's technical team insofar as it reflects our judgments, our assumptions, our projections, our interpretation of the data. It is an input for the board's decision , but it does not necessarily reflect the position of the board or its individual members. I begin then with a description of the initial state of the economy. Core inflation ended 2025 at 5% with an upward trend. Inflation expectations from business analysts and those implied by financial market prices rose sharply following the minimum wage increase decreed in 2026. Total inflation in 2025 closed at 5.1%, very much in line with our forecast in the previous October report. We had upside surprises in core inflation that were offset by downside surprises in food. Some factors that explain the upside surprises in core inflation were the strong dynamics of domestic demand and the labor market amid a growing primary fiscal deficit and the transmission of increases in labor costs associated with the increase in the minimum wage for 2025 and reductions in working hours. The downside surprises in food inflation are mainly due to a good supply of perishable foods thanks to rain. and to the favorable production cycle of this type of goods. And in the case of processed foods, the appreciation of the Colombian peso, lower costs of some inputs, and international prices. Since July 2025, inflation expectations had been rising, and by the end of December all measures had increased significantly. The adjustment of the minimum wage of 23.2%, 17.2 percentage points higher than the 2025 inflation rate plus the increase in productivity, was the trigger for this sharp increase in expectations. It is worth remembering that all measures of expectations across all timeframes continue to be above the 3% target. On the economic activity side, the 2025 growth in our projection would have been 2.9% higher than the 2.6% projected in the October report. Domestic demand would complete six quarters with annual growth exceeding 4%. The growth figure observed in the third quarter of 2025 of 3.4% was higher than our projection of 3%. Behind this we have a strength in private consumption of durable goods, semi-durable goods and services, and also in public consumption. Likewise, there was a significant increase in investment in machinery and equipment and in civil works, despite moderate export growth and strong import dynamism. The most recent data points to economic growth of 3% in the fourth quarter of 2025, higher than our previous projection of 2.7%, with the continued dynamism of domestic demand that we have observed in the last four quarters. The fiscal stimulus would be maintained with high and rising primary fiscal deficits . There would be a sustained increase in remittances and income from some tradable sectors such as coffee and tourism, and we recorded a drop in exports and in the production of coal and oil. The latter would have been detrimental to growth, since without this factor, growth in the fourth quarter would possibly have been higher. At the same time, we continue to observe a tight labor market with a seasonally adjusted unemployment rate below the NAIRU, that is, the level of the unemployment rate that does not generate inflationary pressures and with a downward trend. The signs of a tight labor market remain not only low and declining unemployment , but also high levels of job vacancies. Our interpretation of this data is as follows. First, we observe the coincidence of strong domestic demand and upward surprises in inflation, and these two things point to the presence of what we would call a positive demand shock . In other words, if at the same time the quantities that people demand and that are produced grow faster than we are estimating, and the prices of these goods and services grow more than we were anticipating, it is because there is a stronger demand than we were forecasting. This is what we call a demand shock, which then implies greater underlying inflationary pressures than we had previously detected. In particular, it is worth highlighting the fact that goods inflation has increased despite a stronger and longer-lasting appreciation of the peso. This is a sign, among other things, of a fairly strong domestic demand. Added to the above is the growing risk of more persistent inflation and the unanchoring of inflation expectations. Regarding the latter, we note the increase in all timeframes of the prohibitions and inflation expectations of all agents, as I already mentioned, of entrepreneurs, financial analysts and the expectations implicit in the prices of public bonds, as well as a greater degree of indexation of some items in the basket of services, for example, the case of rents. Additionally, besides its impact on inflation expectations that I already mentioned, the high adjustment of the minimum wage is a shock that results in cost pressures that tend to increase inflation in the medium and short term and reduce economic activity in the longer term. This increase in the minimum wage may also generate demand pressures in the short term, with some additional pressure on inflation through this channel. In this regard, I invite you to consult box one that accompanies the monetary policy report and our labor market report that will be published soon to see a more or less detailed calculation of the effects of the minimum wage, of the increase in the minimum wage. At this point I would like to pause for a moment and make a couple of reflections on a very interesting discussion that has arisen as a result of the increase in the minimum wage, and that is the question of when the increase in the minimum wage affects inflation. So, there have been documents and opinions that say that not all increases in the minimum wage produce significant effects on inflation. That's true. The interesting thing is to go further and ask when or under what conditions an increase in the minimum wage generates significant inflationary pressures and even more relevant whether those conditions, the conditions under which that increase generates significant inflationary pressures, are present or not in the Colombian situation. And to answer this question I would like to give two ideas around a topic that I would call size matters. True, in two dimensions. Size matters in a first dimension related to the magnitude of the increase in the minimum wage in relation to productivity growth. If you have a minimum wage increase that is in line with labor productivity growth and observed inflation, the inflationary effects will be low or perhaps nonexistent. Conversely, if one has a minimum wage increase well above the growth in labor productivity or past inflation, we will likely have very large or even larger effects on inflation. And the reason is relatively simple to understand. When productivity grows, firms' costs tend to decrease. If wages, or the minimum wage, do not rise at the same rate as productivity, then the combined effect of both on firms' costs will be very low, and therefore firms will not need to raise their prices much. What happens when the increase in the minimum wage is far above the growth in productivity? Well, the improvement in productivity and the reduction in firm costs are not enough to compensate for the huge increase in costs that occurs when there is such a large jump in the minimum wage. In that case, the companies have to raise their prices, right? A second dimension of this idea that size does matter has to do not only with how much the minimum wage increased, but also with what the initial level of the minimum wage is on which the growth is applied. And the point here is that when you have a minimum wage that is high in relation to the labor income of a country, that is a sign that many employed people are earning the minimum wage in that country, right? And why is that important? Because if many employed people earn the minimum wage, it means that an increase in the minimum wage will significantly affect the costs of firms . Let's consider, for example, that the minimum wage was a small fraction of the average labor income in the economy, which would mean that relatively few workers earn the minimum wage. If the minimum wage is increased for a small number of workers earning the minimum wage, the impact on firm costs will be small, because few people will be affected and firms will have to pay a relatively small additional cost. Now let's think about what happens if many people, many employed people, earn the minimum wage. In that case, an increase in the minimum wage will generate a substantial increase in the costs of firms and that will in turn be reflected in a large effect of the increase in the minimum wage. So, we have both things, both conditions. Size matters, the size of the minimum wage increase, what I would call here the size of the shock. And how important is that shock, what is the size of the shock's effect taking into account the number of people it affects and therefore the impact it has on firms' costs. What is the situation like in Colombia today? To judge whether the effect is significant or not. And I would start by showing some basic data, and the first is that total factor productivity and labor productivity had annual growth of less than 1% in 2025 according to DANO. Total factor productivity grew by 0.9%, and labor productivity grew by 0.57%. Let's compare these numbers, which are less than one, with the real increase that the minimum wage had for 2026, which was 18%. 18 against less than one. In conclusion, it's a gigantic collision, it's a very big collision. So, our first dimension of size matters, yes it matters, it matters a lot. The crash was huge. Now let's think about the second dimension, how important is it that the minimum wage has increased significantly? In other words, how many people in Colombia earn the minimum wage and therefore how much does that affect companies' costs , right? And for this I would cite some basic data, starting with what the minimum wage is as a proportion of the average labor income in Colombia, 64%. TRUE? Is this big or small? Well, it seems to be large if we compare it with the same statistics in neighboring countries. In Brazil it is 43%, in Argentina 44%, in Mexico 47%, and in Chile 50% for recent years. This implies that it is high in Colombia. In these countries it is already high. In developed countries this fraction is possibly much lower, but in Colombia it is particularly high. Again, this means that a substantial number of people earn the minimum wage. And we see it by looking at the statistics from the large integrated household survey and the pile and the pile. If you look at the large integrated household survey, 17% of the country's employees, roughly one- fifth, earn the minimum wage. That's not insignificant. But more representative and important is that almost half of formal salaried employees earn the minimum wage. Then, a large impact on a situation where the minimum wage is very relevant will undoubtedly generate significant inflationary pressure . What do we see in the inflation expectations of economic agents? People recognize this and therefore acknowledge that it will most likely have a large effect on inflation. In conclusion, as I said, we have a strong effect from a large shock, therefore there will be a significant impact on inflation with a high probability. And what is particularly worrying for monetary policy is that this is happening when inflation is already far from the target. It is one thing if this shock event had occurred with inflation at 2% below the target of three or even 3%. Okay, there's a crash that's diverting us from the finish line, and then we'll come back . But the most worrying thing is that that was not the situation. This crash came when we were far from the goal, 5%. Goal three, we were at five and around five we had the crash. This implies an even heavier burden on monetary policy to bring inflation back to 3%. What, then, are the policy implications of this whole situation? First, as I already mentioned, inflation in 2026 would have an upward trend and move away from the target, in contrast to our October projection. If you review our October inflation projection, which I will show later, we had a trend of rising inflation towards 3%, but by the end of 2027 this is no longer due to this shock. Well, we would have an increasing trend in inflation in 2026, moving away from the target, and only in 2027 would we be returning. Secondly, inflation expectations, as I already mentioned, would have become unanchored by the end of December. Those expectations were already above 3%, today they are much higher than 3%. In that sense, we say that those expectations are clarified. Third, one of the consequences of that jump, that leap in expectations, is that the stance of monetary policy was automatically relaxed after the increase in the minimum wage. What does this mean? Monetary policy operates through several channels. To measure their position, one calculates what is called the ex-ante real interest rate, what is that? It is the policy interest rate of the Central Bank minus the inflation expected by agents in the future, not the past, the expected, that is why it is called ex-ante. And this is the appropriate measure to gauge the stance of monetary policy. Because? Because when people make spending decisions, households and firms, what matters is what the inflation will be in the future, not what it was in the past. For example, if a household is going to buy a car, go on vacation, or buy an apartment, what is important? The important thing is not how much inflation was last year, but how much it will be going forward, because that number, what inflation will be going forward, will determine the growth of your income and with that income you will be able to pay off the loan. Similarly, a firm, a firm that goes into debt to undertake an investment project and produce goods to sell in the future. What inflation rate is relevant when evaluating whether or not it is worthwhile to undertake this investment project? So, future inflation, right? the prices at which it will be able to sell its assets in the future in order to pay off the loan and obtain a profit. Therefore, the Ex-ante real interest rate is our indicated measure of the stance of monetary policy. What happened to the increase in the minimum wage? Well, inflation expectations rose. Given an interest rate from the Central Bank that was previously at 9.25%, 25%. This increase in expectations automatically lowered the ex-ante real interest rate and therefore generated a less contractionary monetary policy stance. Now, in this situation, for firms and households, it is less burdensome to go into debt or stop saving in order to spend. And that goes against the decline of inflation towards the target, which is our objective. Therefore, one of the immediate consequences of the increase in the minimum wage was, as I say, the relaxation of monetary policy without the need for the Bank of the Republic to have lowered its nominal interest rate. Fourth, as I already mentioned, the data we observed and the confluence of higher-than-expected core inflation with higher-than- expected growth signals that the economy has excess demand. In other words, the economy's spending, consumption by households and the government, private and public investment—the sum of all of that— is higher than the level of production that the economy can sustain over time without running into trouble. Already. And this has an important implication, which is that in this position, in this situation, there is no longer a dilemma for monetary policy. What does this mean? that the Central Bank can, with its instrument, which is the interest rate, by raising it, fix both problems and get closer to its two objectives. What are the objectives? Bring inflation down to three and bring the economy's production and demand in line with what can be sustained in the long term. Therefore, by raising the interest rate, both objectives are achieved. There is no dilemma, there is no conflict between the objectives. And this is different from what happened to us a few years ago when inflation was above target and therefore interest rates needed to be raised to bring inflation to the target, but production and demand were below sustainable output. We need to lower the interest rate to bring demand towards sustainable production. So, there was a conflict in that case. There is no conflict today. Today, both objectives of monetary policy are achieved by raising the interest rate. Ready. All of this leads us to the conclusion that monetary policy must be adjusted swiftly to re-anchor inflation expectations, bring them back closer to 3%, resume a downward path of inflation towards 3%, and eliminate those excess demands that I have already described. That is why the board of directors increased the monetary policy rate by 100 basis points from 925 to 10.25125 in January. The other implication of this is that in this context where inflation is moving away from the target, inflation risks become more important in determining monetary policy. If my goal is to reach three and I am moving further away from three, all the risks that involve a possibility, a probability of moving further away , become more important in my policy analysis. Well, having said that, I will now describe the main assumptions of the international context that are behind our forecast, starting with the growth of external demand that was revised upwards for 2025 and 2026 due to the better performance of some trading partners. By 2025, our partners' projected growth is 2.4% higher than the 2.1% we had previously. By 2026 our partner's growth would be 22 versus 2 previously, and by 2027 that growth would be 2.1%. This upward revision is due to an acceleration of economic activity in the United States driven by private consumption and better- than-expected performance in other partners. All this in an environment of reduced global trade uncertainty, resulting from trade negotiations and a tariff rate in the United States that is actually lower, or turned out to be lower, than expected. However, we remain highly uncertain about this assumption due to the still unclear trade policy and macroeconomic situation in the United States, the persistent geopolitical tensions, and the recent trade frictions with Ecuador. For its part, the terms of trade, that is, the purchasing power of our exports, how much, how many imports our exports can buy. These terms of trade improved in 2025. A deterioration in this purchasing power is expected for 2026 and 2027 due to lower export prices for some of our main export products. In 2025 there was an improvement due to better international prices for coffee and gold, also due to the fall in import prices, which more than compensated for the lower prices observed for oil and coal. For 2026 and 2027 we anticipate a deterioration, a reduction due to the expected moderation in the prices of mining and energy goods and coffee. In this context, oil prices would fall in our forecast due to a high supply from non- OPEC countries in particular and the accumulation of oil inventories in advanced economies. As we can see in the chart on the left, our forecast includes an upward revision of our terms of trade, which is explained by the higher observed and projected prices of gold and coffee compared to our October forecast. Turning now to external financial variables, the future path of the US Federal Reserve's interest rates was revised slightly downwards due to the uncertainty associated with price developments and labor market dynamics in the United States. In December, as we know, the Federal Reserve reduced its interest rate by 25 basis points and kept it stable in January. The most recent figures point to a prospect of greater growth and mixed signals in the United States labor market . Meanwhile, inflation continues to rise above the target, currently at 2%, despite the expected moderation of inflation by the end of 2025. This is all happening against a backdrop of 12-month inflation expectations from households, markets, and the Federal Reserve itself remaining above the 2% target. In our scenario, we have two 25 basis point reductions in 2026 and zero in 2027. Meanwhile, the RIDU premium assumption for Colombia is very similar to the one we had in the previous report, maintaining an upward trend. At the end of 2025, we observed a slightly lower premium than we had assumed in October because external financial conditions for Colombia became more favorable. We are observing a weakening dollar and a lower perception of risk in emerging economies. However, we maintain a growing trend for this indicator in our forecast due to the high probability that the public debt ratio will grow and be higher than its average in the past or remain higher than its average in the past, and due to the uncertainty inherent in the electoral period in Colombia this semester. For its part, the long-term trend component of this risk premium remained the same as in our October report, which implies that we did not modify our assumptions about the neutral real interest rate, which remained at 3.1% for 2026 and would be somewhat increasing over the forecast horizon. Let's move on to the macroeconomic forecast, starting with inflation. Core inflation would continue to rise in 2026, in contrast to the decline we were projecting in the previous report. Core inflation would now be higher than before in both 2026 and 2027. It would be 6.3% in 2026. Previously, we were projecting 3.5%, and it would be 3.8% in 2027. Before, we had 3%. The difference between the two projections was clearly shown in the graph on the left. The upward revision compared to the October report is obviously due, firstly, to the unanticipated increase, at least in that size, of the minimum wage, to the excess demand that I have already mentioned, to the persistence of upward surprises, for example, in the case of rents, to the indexation to higher inflation at the end of 2026 and to the impact of taxes associated with the economic emergency. At the time of making these forecasts, the economic emergency was not yet suspended and our forecasts include some of the effects of the emergency. However, for 2027 our forecast, as you can see, is for a decline in core inflation supported by a restrictive monetary policy stance . This restrictive monetary policy stance, which I will discuss later, is reflected in a reduction in domestic demand growth and, therefore, a negative output gap in 2027. This is due to declining inflation expectations consistent with the monetary policy response, disinflationary pressures on the real exchange rate (i.e., the peso's appreciation would be maintained to some extent), which would help prevent inflation from rising too much in 2026 and cause it to fall in 2027, and to mitigate the supply shocks we anticipate in our 2026 forecast. In particular, we assume there will not be another major minimum wage shock. The inflation rate for the food basket was also revised upwards for 2026, going from 32% to 656%, and in 2027 it would be 3.1%. The inflation rate for the regulated goods basket was also revised upwards for 2026, rising from 4 to 68, and is expected to close at 39% in 2027. The revision in the case of food is explained by the effect of the minimum wage on the prices of processed foods and by higher international prices of inputs and some foods, particularly rice, oils, and meat. In the case of regulated services, the upward revision is due to the direct effect that the increase in the minimum wage has via costs on the prices of various regulated services such as regulated education, public transport sector rates, parking lots and some public services as well. This includes increases in gas tariffs for the first quarter of 2026, given the supply restrictions the country has in that market and an indexation in 2027 to a higher inflation rate in 2026. These projections include a reduction in the price of gasoline by February of 300 pesos per gallon. Finally, the minister announced last Friday that the cut would be 500, so here we have the 300 that they had initially announced, right? The entire 500. With all this, the total annual inflation would be at the end of 2026 at 6.3%, before we have 3.6, a considerable increase and by 2027 it would reach 3.7% before 3%. Despite the significant upward revision in 2026, inflation, as I already said, would return to an upward trend in 2027, converging now more slowly to the 3% inflation target, which would not be achieved by the end of 2027, given the large magnitude of the inflationary shocks we are observing. Turning to economic activity, the economy is expected to grow by 2.6% by 2026. 6%, slightly less than the 2.8% we predicted in our previous report. For 2027 we also reduced the growth forecast, as can be seen in the chart on the left, to 1.6%. This forecast has some characteristics that vary over time. For example, in the following months, economic activity would continue to accelerate due to the persistence of the private consumption dynamics we are observing and the fiscal stimulus. also due to the short-term effects of the minimum wage increase on the economy's demand. Then, the economy would slow down due to several factors. First, due to the lower growth we anticipate in remittances from workers abroad. They would continue to grow, but more slowly now, and because of lower income from coffee exports, both in terms of quantity and international prices. We also have that the minimum wage supply shock would begin to affect production from the supply side, again affecting costs in a persistent way. The economic sectors, the companies in various companies in the economic sectors would begin to cut their supply and that should be reflected in lower production or lower production growth over time. And finally, as I have already mentioned, the required adjustment of monetary policy to put inflation back on a downward path would have impacts on demand growth, on the output gap, and therefore also on growth in 2027. Excess demand, our variable that we measure by the output gap, is the difference between the economy's output and the sustainable level over time. This was revised upwards taking into account the data we observed in the national accounts, which had significant upward revisions in past quarters and positive surprises, as I mentioned in the third quarter of 2025, and also taking into account the strength of the labor market that I already mentioned and due to a refinement of the estimate of the contribution of this strength of the labor market in the calculation of excess demand. For this reason, I invite you to consult box number two that accompanies this report, where we present a new version of one of our forecasting models, where part of the added value or improvement has to do with a better understanding and modeling of the labor market and therefore its contribution to estimating excesses or demand effects. Uh, as I mentioned, this positive output gap in 2026 is consistent with the already observed upside surprises in core inflation before the minimum wage increase , the strength of domestic demand, the tight labor market, and the high and persistent primary fiscal deficit, as well as the expansion of the labor market. All these signs support the estimate of a positive output gap. The labor market, meanwhile, is projected to show an upward trend in the urban unemployment rate, with an average of 9% in 2026 as the most likely value and 10% for 2027. The potential growth implied in this forecast for 2025 and 2026 would be 2.8% and 2.7% for 2027. The current account deficit in the balance of payments would be used in 2025 and 2026 to reflect the dynamism of domestic demand. This deficit would increase from 1.6% of GDP in 2024 to 24% in 2025 and to 26% in 2027, as I mentioned, mostly due to higher imports of goods and services resulting from increased domestic demand, but also due to a reduction in oil and mining export revenues due to lower international prices and export volumes, along with a drop in the value of coffee sales in 2026. Let's now turn to describing the monetary policy behind these projections. The point here is that the increase in the inflation forecast and the materialization of the expectations anchoring risk that I already mentioned require a swift adjustment of monetary policy so that the policy remains restrictive and therefore supports the convergence of inflation to the target. This is also reflected in market expectations regarding the policy interest rate, which is shown in the graph on the left. The blue line shows an increase compared to the orange line, which was the analysts' previous projection of the policy interest rate. That median path, as we call it, of the policy interest rate according to analysts, would rise to 11.25% by the end of the fourth quarter of this year and then begin to decline towards the second quarter of 2027. In our case, we also have an upward adjustment in the interest rate that underlies our forecasts, which would be, as I have already said, compatible with inflation falling in 2027 and approaching the 3-4% range by the end of 2027, but that path would be higher than the one you see here from the analysts. Uh, which is consistent with our projection of inflation converging, as I said, to 3.7% by the end of 2027, while analysts at the median have a higher inflation projection for the same period. Remember, this is not a projection by the technical team about what the board of directors will do or what they will decide in the future, and it does not necessarily reflect the position of the board or its individual members. What are the risks of this forecast I just showed? With the materialization of the sharp increase in the minimum wage and its incorporation into the baseline forecast, the risks to the inflation projection are now more balanced than before. Previously, we faced the risk of a very large increase in the minimum wage, but that has now materialized; it is no longer a risk, it is now part of the forecast. That's why now the forecast, the risks of the forecast, are more balanced than before. And for its part, the balance of risks to growth is skewed to the downside. What kind of risks are we considering here? As we have always classified them, depending on their impact on inflation growth and the interest rate. Among the risks that would imply increased inflation and interest rates, and therefore lower growth, are the risk of greater inflationary inertia and a greater unanchoring of expectations associated with prolonged periods of inflation relative to the target. We also have the risk of a greater impact of the minimum wage on prices given the magnitude of the increase in 2026 and the possibility of a future adjustment also in 2027, which as I said we do not have in our base forecast. We also have here the risk of deterioration in external financial conditions or in the perception of sovereign risk that result in upward pressures on the exchange rate and on prices. For example, a deterioration of the fiscal situation or a less favorable path for Federal Reserve interest rates. We also have here the risk of further adjustments in the prices of regulated goods, for example, through gas prices, which, as I already said, face structural problems. In the field of risks that involve higher inflation, higher growth and, therefore, a higher interest rate, we have first of all a greater persistence of internal dynamics. private, in case consumption continues to be strong, or if it is not, it becomes stronger than we are forecasting, or there is a strong rebound in investment above what we are forecasting. There we would have a situation of that nature, or also due to a greater fiscal stimulus. If those conditions arise, there would be demand pressure that would drive both growth and inflation upwards. There is also the risk that we are mistaken and that the neutral real interest rate, that is, the one that does not exert influence on demand, on growth or the behavior of demand, is higher, and the risk of a possible effect of a greater effect of the increase in the minimum wage on private consumption. On the side of those risks that have uncertain effects on inflation and the interest rate and uncertain risks also on growth, we have the reduction of gasoline prices, the already announced and possible additional reductions, the elimination of some taxes due to the economic emergency and the regulation of investments in pension funds. At first glance one would say that all these things could bring down inflation and yes, indeed there is an effect, there are direct downward impacts on inflation. If gasoline prices go down, there would be a negative effect on inflation. Similarly, if those taxes that came with the economic emergency were suspended or eliminated indefinitely, something similar would happen, or the regulation of pension fund investments could lower the exchange rate. All of those things would put downward pressure on inflation. However, and this is good to remember, those are not the only effects that these risks have. For example, the first two, the reduction of gasoline prices or the economic emergency taxes, have an impact on fiscal policy, widen the fiscal deficit and that can have an effect on demand by increasing the fiscal stimulus or on the risk premium or seeing the country fiscally more vulnerable and that could have some upward effect on inflation. Similarly, the regulation of pension funds, in addition to implying greater flows of resources into the country, means that a portion of those resources must be invested internally. Where and how investments are made can generate major impulses in demand with inflationary impacts. So, that's why the effect, as we say in the specialized jargon of general equilibrium, is more difficult to discern. And finally, regarding those factors that pose downside risks to inflation, interest rates, and overall growth simultaneously, we would have eventual reductions in public spending required to contain the fiscal deficit and avoid sharp increases in public debt. All these risks were considered in the balance sheet that we present and which is illustrated in the predictive density distributions that accompany the monetary policy report. However, I would like to emphasize here that the projection of a growing gap between inflation and its target in 2026 and the presence of excess demand also in 2026 imply an important consideration of the upside risks to inflation when deciding on monetary policy. Finally, I would like to invite you to consult our boxes, the two boxes that we published with the monetary policy report. The first box is very interesting, I recommend it, because it studies the possible macroeconomic effects of an increase in the minimum wage, not only the increases on inflation, which is what I have explained today, but also effects at different times on formality, on production, on investment. These are all interesting effects that escape, let's say, the more short-term analysis that we have in the monetary policy report , but they are nonetheless relevant, especially in light of the very large size of the shock we have had. The second box is an explanation of an extension we have of a model, of one of our forecasting models, the 4GM model, in which we add two things, one, a labor market module that allows us to simultaneously explain not only inflation or growth as we have in the first version of the model, but also other relevant labor market variables such as unemployment, wages, etc. That model, for example, allows us to explicitly include minimum wage shocks. It's quite useful. Another innovation is that it broadens the scope of the model in terms of understanding external factors by not only considering oil prices, but all our terms of trade. I think it's an important step forward. And finally, our market report has two sections apart from the current situation analysis that I recommend you read carefully. The first is about the effects of this minimum wage shock on formal employment. Again, in this report we have focused on the effects on inflation. There is also an effect on formal employment. Here in this box you will see a re-estimation of the effects according to our models and tools of the impact of the minimum wage on formal employment. Interestingly, it focuses not only on employment, but also on the various ways in which formal employment is affected , including the destruction of formal employment, the creation of formal employment, and so on. I think it's quite interesting and worth checking out . And the second is about a macroeconomic estimate of the effects of a reduction in non-wage labor costs on the entire macroeconomy. Okay, that's all for now, and I'll be waiting for your questions. Thank you very much, Dr. Hernando, thank you very much for your presentation. Okay, we're opening the question round; we have some questions formulated by the analysts. I'll start with Camilo Pérez's question, which asks what you think about the total gasoline price adjustment in 2026 in terms of inflation. Yes, of course, Camilo. In this forecast, we have a drop of 300 pesos in February. Again, this forecast was made before the minister's announcement last Friday. So, we would be missing the 200 pesos that the minister already mentioned or announced, and possible additional reductions. Obviously, the question arises of, well, what if that reduction were very large, would the effects of the minimum wage be diluted ? Obviously this depends on the magnitude of the cut, but in some sensitivity analyses that we did, we thought that feasible cuts that do not significantly compromise the fiscal position would not be enough to affect, let's say, the trends or the qualitative movements that I just wrote about. Thank you, Dr. Fernando. I remind you that the presentation just given by the technical manager of the Bank of the Republic can be viewed right now , from this moment on, on our website www.ban.gob.co. The following question is from analyst Alejandro Reyes. He says, "The repeated increase of the minimum wage above inflation plus productivity can cause a permanent deterioration in GDP growth, that is, eventually affect potential growth. Agreed? As I said, we have that incorporated into our forecast, and it can be seen in the slightly decreasing path of potential GDP. Here we are talking about a horizon of only 2 years between 2026 and 2027. So, we have some of that there. But I reiterate, the most interesting effects in that sense, in terms of potential, the labor market, the productivity of the economy, will be seen over possibly a longer period, and those effects may be even greater. That is why I invite you to consult box number one of our report, which has a description of all those effects over time. Dr. Hernando, the second question says, "The structure of the exercise you present assumes an active monetary policy with a rule designed to bring inflation to its target within the policy horizon." This means that on several occasions the inflation estimated by the technical team for the second year of the exercise is lower than what has been observed. It happens to us too, it has happened to us analysts, what probability do you assign to achieving inflation around the estimated level and what would be the most predominant bias regarding that estimate? Yes, okay . over there. Well, that probability is quantified in the predictive densities that are in the published report and what we see is towards the end of the forecast horizon an upward bias in inflation that makes the probability of inflation being below four not very high, rather rather low due to the biases we have there, mainly derived from the upward biases we have on the risk premium of Colombia, under the assumption that there is no fiscal adjustment. important throughout this period, which is a strong assumption. Well, before, in the first year and a half, I would venture to say, of the forecast, the bias is very neutral, that is, there is a 50% probability that inflation, around 50%, will be above or below the forecast that we are presenting. Thank you, Dr. Hernando. The next question states, "The complex fiscal situation they reference may affect the neutral interest rate. The exercise could be underestimating it, and this could be consistent with a less contractionary stance than initially expected, also partly explaining the combination of a positive output gap and persistently high inflation. Undoubtedly, this is a risk we have been pointing out in several reports and forecasts. Since one doesn't observe the neutral rate, there is always uncertainty surrounding its value. We explicitly consider the risk premium as one of the main determinants of this neutral interest rate when trying to understand and estimate it, right? And in our projection of that risk premium, we look at its trend component, and we associate that trend component, among other things, with the expected trajectory of public debt in general, the fiscal situation, and economic uncertainty, among other factors. So, yes, we have that captured there, but again, there is a lot of uncertainty, a lot of risk surrounding this, and it is possible that we might be mistaken. Therefore, in describing the risks, one of the upside risks we had regarding inflation and the interest rate, and downside risks regarding growth, is that we may at some point have to acknowledge a higher neutral interest rate. Analyst Ángela María González asks, "How do you expect the unemployment rate to react to the minimum wage adjustment?" They expect the labor market to absorb the adjustment as it did in previous years through informality. Yes, let's say, it's difficult to answer that question because in history we haven't had such a large, such a large increase in the real minimum wage as today. So, history can give us an idea, but we don't have such an exaggerated event, so to speak, as the one we have right now. However, based on history, what we have seen is that the informality rate is more responsive to the minimum wage, not so much the unemployment rate. We'll see. We have a natural experiment here. Dr. Hernando, analyst Andrés Langebek says, "According to the forecasts, according to the bank's forecasts, what is the magnitude of the exchange rate appreciation attributable to the increase in interest rates to control the higher expected inflation?" The simple answer is, I don't know, I don't have that exact breakdown of the exchange rate by determining factors in our forecast. What we have in the forecast that may be impacting the exchange rate, and as you saw, we have a negative real exchange rate gap, meaning the exchange rate is helping to curb inflation. The main determinants of that situation are, firstly, the shocks that the exchange rate has initially received , right? Shocks that may be related to the weakness of the dollar, to fiscal policy, right? When you do the sums and subtractions over a prolonged period, there are significant net monetizations of resources into the economy, of external resources into the economy, and this puts downward pressure on the exchange rate and, in effect, on interest rate differentials that are affected by monetary policy, among other things. There we also have related effects, for example, on the terms of trade, which, as I showed, have improved and should weaken going forward. So, part of the appreciation we have observed can also be explained by terms of trade, and part of what would happen in the future would have to do with some weakening of those terms of trade or some deterioration of those terms of trade. However, I do not have in mind at least an attribution of all those factors to the observed or projected behavior of the rate of change. Analyst Julio Romero asks, "Following the change in inflation prospects and the unanchoring of one- and two-year expectations, what do you estimate the real interest rate should be ?" Well, as I mentioned, the impact of the minimum wage increase was immediate on inflation expectations and instantly relaxed monetary policy. If we are in a situation prior to the increase in the minimum wage, we need to maintain a restrictive monetary policy, that is, high ex-ante real interest rates to bring inflation to three. Now, after the shock, we have to at least offset the increase in inflation expectations in order to maintain the same monetary policy stance we had before. That gives a measure of the need for adjustment. Obviously, going forward, we need to keep an eye on what happens with inflation and how those inflation expectations are moving in order to recalibrate the necessary adjustment of the interest rate. Journalist Paula Delgado asks, "How quickly could we return to a path of controlled inflation and eliminate excess demand through interest rate adjustments ? And how drastic should the monetary policy adjustment be to achieve both objectives?" Yes, this is a very interesting question because, in theory, one could have an extremely drastic monetary policy that raises interest rates very quickly, rapidly eliminates excess demand, promptly lowers inflation, and quickly offsets the inflationary effects of the shocks I already mentioned. The problem is that this could have a considerable cost in terms of economic activity and market volatility, right? If interest rates are adjusted too drastically, financial markets can experience undesirable volatility. So, in that sense, and to make the adjustment as smooth and cost-effective as possible, monetary policy is indeed adjusted—it is adjusted quickly and sharply— but not to such a degree that it produces undesirable increases in unemployment or sharp declines in growth. or inconvenient volatility in the markets. Thank you, Dr. Hernando. The next question is from analyst Jacqueline Piraján and she says, "Given the path resulting from the bank's forecasting exercises , the decision made at the January meeting aligned with the technical team's calculations." In the minutes, the majority group expresses that it is advisable for the rate increase to be concentrated at the beginning of the tightening phase. This is consistent with the results of the path estimated by the technical staff. Yes, essentially. Qualitatively, that's it. That's the idea. The point here, and I'm taking advantage of the question to explain this idea that I find interesting, is that if you have an inflationary shock, there are several ways to resolve it. One can make a very gradual increase in interest rates, and then very slowly lower inflation. That may not be the best thing for the economy. If, faced with a very large inflationary shock, I raise interest rates very slowly, what will happen is that real interest rates , again the nominal rate minus expected inflation, will fall and remain low for a long time. So what I'm going to be doing is setting the economy on fire, right? Or by very slowly removing the stimulus that was generated in that way. And what does that imply? This implies that inflation will then be more difficult to lower because it will possibly reach higher levels. All these indexation mechanisms are going to be activated , credibility is going to be lost , inflation expectations are going to rise, and when I want to lower it, when I want to lower inflation, I'm going to have to raise the interest rate much more sharply, right? And I'm going to have to induce a slowdown in the economy perhaps much stronger than I could have done or than it would have been if I had initially taken a slightly stronger stance of raising the interest rate faster, right ? To close the excess demand that exists, control inflation expectations, help inflation converge faster, and avoid having to raise interest rates more sharply later on, right? In that sense, in the current circumstances where we have excess demand and strong inflation shocks, unanchored expectations, the most advisable thing is to have a reaction, as we say in the presentation, a quick, agile reaction of monetary policy to have a more efficient adjustment, let's say, of the economy to the inflationary shock. A new question from analyst Alejandro Reyes reads, "Some time ago, the Bank of England conducted a similar exercise to the one the Central Bank of Colombia performs, but with the assumption of stability in the monetary policy rate . Have you carried out this type of exercise on the current scenario? Can you tell us what the effect on inflation and activity would be over the exercise horizon? No, we don't routinely perform that simulation because it has conceptual problems, right? It has problems with inflation convergence. When you leave interest rates fixed for two years, it becomes extremely difficult to achieve convergence. What we have done along those lines, and I connect this to the previous answer, is to simulate different interest rate paths , as I mentioned, some with slower growth, others with faster growth, and see which path generates the most efficient result for the economy. Efficient in the sense of reducing the positive or negative output gaps in the economy and reducing the inflation gap with respect to the target, and on this occasion, as I mentioned, the Paths that are more advanced, that are faster than the monetary policy response, produce more efficient paths in terms of generating smaller output gaps, both positive and negative, and a faster convergence of inflation to the target. Thank you, Dr. Vargas. The next question is, "What assumptions do you make about the fiscal scenario over the exercise horizon?" In particular, what are you anticipating regarding the behavior of the primary and total deficit? Yes, in our fiscal scenario, our central forecast, the fiscal scenario is one of a deficit that is not corrected, that remains high, a little higher than what the government says for 2026. That is the central scenario. Under these circumstances, it is quite likely that the debt-to-GDP ratio will continue to rise, not only in 2026, but also in the forecast horizon 2026-2022, increasing the risk premium and having the effects I have already described. A key assumption in this forecast is that the country maintains its access to external financing despite having a deteriorating fiscal situation, at least from the perspective of the deficit and the primary deficit. Therefore, one of the risks I point out is the reduced willingness of the international market of funds to finance Colombia's fiscal and external deficits. In a situation like that, we could face a complicated scenario of currency depreciation, greater inflationary pressures from that side, and undoubtedly an impact on economic activity. The next question is related to that answer you just gave us. It says, "The government has recently considered a change in pension fund investments. What are your thoughts on the potential impacts of this measure beyond the effects on exchange rates? For example, regarding the credit channel of monetary policy, it could lead to the central bank needing to be more aggressive in its policy to balance this potential increase in local liquidity and achieve the desired aggregate effects. Of course, I already mentioned that, the description of the risks. It's complicated to understand all the macroeconomic effects of a measure like the one being proposed. Obviously, as I mentioned, there's an impact on the foreign exchange market and downward pressure on the exchange rate that would alleviate inflationary pressures to some extent . However, again, and the question reflects this, this money has to be invested somewhere, right? One possibility is that it's invested in tests, another possibility is that it's invested in deposits within the local financial system and channeled through that route to credit. It's possible that it Invest in the productive projects that have been publicly discussed, right? If so, in those last two cases, there would be some effect on demand that could weigh down or compensate to some extent for the impact on the exchange rate. In our case, we would have to see or try to quantify which of the two effects is greater over time and from there determine what the appropriate monetary policy response would be . At this moment it's difficult to do so, but it's interesting to consider all the channels that this entails. If, for example, a significant portion of that money is invested in testing, the interesting question there is, okay? If the deficit doesn't change, the fiscal deficit doesn't change, and there are new clients who want to demand more testing, then there are others who no longer demand it. If those others are, for example, foreigners who were going to bring the money and no longer do, then the exchange rate effect isn't so clear, right? All those kinds of things would have to be considered to have a more precise answer on the matter. Dr. Hernando, journalist Óscar Castañeda here has I have a question for you. Good afternoon, Hernando. So, household consumption will be resilient to the potential contractionary effects of monetary policy and the observed negative effects of the minimum wage increase . The minimum wage increase, as we mentioned and as is in our forecasts, has a positive short-term impact on consumption, on demand, right? It's clear why. Later on, however, that effect diminishes, and the impacts on the economy's supply prevail over those on demand. The monetary policy response, in terms of raising interest rates and tightening the stance, would undoubtedly have an impact on consumption. It's one of the transmission channels, right? At this moment, consumption is above its trend levels, levels that could be sustained over time, right? One would hope that some of the effect of monetary policy would be mitigated through a slowdown in consumption. First, to return it to a sustainable trend, and second, to support the reduction of inflation. So, without a doubt, that It is one of the monetary policy channels that would be in operation. Later on, and this is a very interesting question, the effects of the minimum wage increase would tend to generally reduce the level or the path, let's say, of the country's production, right? Well, because they basically make production more expensive. There is, for example, and associating it with some of the previous questions, possibly a shift of formal labor to informal sectors that are, in principle, less productive than the formal sector. So, net over time, the economy becomes less productive, and being less productive, household income ends up being lower, and their consumption is affected in the longer term. Dr. Fernando Vargas, Technical Manager of the Bank of the Republic. Thank you very much for your presentation and the respective explanations. And likewise, to all the analysts and journalists who have participated in this press conference and presentation of the monetary policy report, which, I remind you, you can consult on our website, as well as the presentation that our Technical Manager just gave. Thank you all again, and we'll see you next time.