Colombia President Gustavo Petro. — Bloomberg
Bogota: Colombian swap rates have soared after President Gustavo Petro announced a 23% increase in the minimum wage, stoking bets that the central bank will have to hike interest rates to combat the policy’s impact on prices.
Short-term interest rate swaps, a gauge of investor sentiment about monetary policy, rose by as much as 69 basis points, reaching the highest levels since March 2023 as markets digested Petro’s Monday announcement on Tuesday.
The move reflects beliefs that the decision will trigger significant monetary policy tightening this year with Credicorp Capital expecting policymakers to raise borrowing costs to near 11% – from 9.25% currently – while Goldman Sachs estimates a year-end rate of 10.75%.
XP Investments said an increase of 200 basis points or more now “appears plausible”.
The salary boost, unveiled as Petro’s coalition prepares for elections this year, will help bring the minimum wage in line with a so-called “living wage” and allow families to afford a basic basket of goods, the president said in a televised speech.
The monthly base salary including transport will rise to two million pesos or around US$530 this year.
“These are measures that will directly reduce poverty,” Petro, whose four-year term ends in August, said.
His administration downplayed the inflationary impact of the wage increase, with Labour Minister Antonio Sanguino saying in a press conference that the price effects will be “minimal” even as consumer demand rises.
But the announcement came amid a fragile fiscal situation that had already begun to place pressure on Colombia’s central bank, which held interest rates steady for a fifth consecutive meeting in November 2025.
Rate hike
An expected hike in interest rates “will seek to anchor inflation expectations, which are reflecting right now in the swap curve,” said David Cubides, chief economist at Banco de Occidente.
He warned that borrowing costs could reach 11% in the short term.
Colombian US dollar bonds were also down across the curve, underperforming emerging-market peers, while yields on local currency bonds rose.
Central bank co-director Mauricio Villamizar earlier warned that a large increase in the minimum wage was among the inflation risks that might force policymakers to hike borrowing costs.
It follows the 9.5% rise to the minimum wage enacted in 2024, as well as a labour reform bill passed in 2025 that expands overtime pay for workers.
The real increase is more than 18 percentage points above the inflation forecast for 2025.
The government imposed the wage hike after business leaders and labour unions failed to reach an agreement.
The boost announced by Petro is nonetheless higher than the around 7% increase business groups preferred, and also bigger than the 16% unions sought.
“This is the largest hike in recent history in Colombia and far exceeds the existing rules, which are limited to annual inflation plus productivity gains,” Alejandro Arreaza, an economist at Barclays, wrote in a note.
“Had the rule been followed, the increase would have been about 6%; the rise is nearly four times larger.”
Barclays forecasts a hiking cycle that totals 125 basis points, with the benchmark rate reaching 10.5% in April this year.
The wage jump could push inflation to accelerate past 6% by the end of this year, according to Camilo Pérez, chief economist at Banco de Bogotá.
Not only will the move lead the central bank to raise its key rate starting this month, but it may do so with half a percentage point increases, he said.
Eye on inflation
Colombia’s national unemployment rate, meanwhile, fell to 7% in November last year, according to official data published. That’s down from 8.2% in October and represents the lowest level in the data series dating to 2001.
Economists in the latest central bank survey expected inflation to end 2025 at 5.19%, and then tick down to 4.59% by the end of this year, which would mark the sixth consecutive year the bank misses its 3% target.
Petro’s government also plans to use emergency powers to raise around 11.1 trillion pesos via higher levies after congress rejected a tax proposal meant to shore up a deteriorating fiscal picture, Finance Minister German Avila said at a press conference.
The government is decreeing an increase in the top wealth tax rate to 5%, from 1.5%. It will also reduce the threshold at which taxes become payable to two billion pesos from 3.6 billion currently, Avila said.
He added that the government will seek to triple a surcharge on financial services companies to 15% while making oil royalty payments non-deductible. — Bloomberg
