Behind the historic Monetary Policy Rate increase

• After inflation slowed and returned to the BCH's tolerance bandFootnote 1^[1], it began to pick up again from March 2024 (Figure 1), driven by rising fuel and services prices and sustained growth in private-sector credit (BCH, 2024a). By July 2024, inflation had reached 5.06%, exceeding the tolerance bandFootnote 2^[2] and the BCH's initial projections (BCH, 2024b).
• In response, the BCH raised the TPM from 3% to 4% in August — the largest increase in 12 yearsFootnote 3^[3] (Figure 2).
• Two months later, the BCH raised the TPM again from 4% to 5.75%, marking the largest adjustment since the instrument was adopted and bringing it to levels similar to those seen before the pandemicFootnote 4^[4] (BCH, 2024a).

How does the BCH respond to inflation?

The BCH is responsible for conducting monetary policy, which aims to manage economic fluctuations and keep prices stable so that money does not lose value rapidly.

The key link: money, rates, and inflation. When there is too much money in circulation, households and firms spend more and prices rise (inflation). The BCH controls inflation through two channels: adjusting how much money is available, and moving the Monetary Policy Rate (TPM)Footnote 5^[5] to make credit more or less expensive and saving more or less attractive. Less money + higher rates = curbs inflation. More money + lower rates = stimulates the economy.

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• At the start of 2024, the BCH projected that inflation would converge to the tolerance band (3%–5%)Footnote 6^[6], but months later this didn’t happen, forcing significant adjustments.
• It was also necessary to align the TPM with international rates, particularly the U.S. Federal Reserve rate, to make lempira-denominated investments more attractive and strengthen the external position.
• These measures came in a context where the International Monetary Fund (IMF) had already noted in September 2023 that the TPM (then at 3.0%) was below the neutral rate — that is, the rate that neither stimulates nor restrains the economyFootnote 7^[7] — suggesting the need for an upward adjustment.

• All investment instruments — BCH bills, bonds, and Standing Investment Facilities (FPI’s) — increased their yields following the TPM increases (Figure 3).
• Raising the TPM alone is not enough if there are no instruments available for placing those resources. The BCH therefore also implemented open market operations (OMOs)Footnote 8^[8], issuing financial instruments (bonds and BCH bills) to withdraw liquidity from the financial system.
• In tandem, financial institutions shifted resources into BCH instruments. Between October 2024 and July 2025, voluntary investmentsFootnote 9^[9] by the financial system grew by 54%Footnote 10^[10] (Figure 4). This reduced the resources available for lending to the public.
• The TPM adjustment also raised the cost of money in the interbank market, making loans between banks and credit operations with the BCH through Standing Credit Facilities (FPC’s) or reposFootnote 11^[11] more expensive (Figure 5).

• The higher cost of credit and the reduced availability of funds for public lending appear to have influenced market interest rate behavior. Although rates were already on an upward trajectory before the BCH's measures, this process accelerated from October 2024 onward.
• In the six months before the BCH's first adjustment, the lending rate (in domestic currency) was growing by an average of 1.4 percentage points (pp); in the six months after, the change rose to 3.9 pp (Figure 6).
• As a result, the flow of new credit from the financial system began to slow: the year-on-year growth rate before the BCH's measures was 16%; thereafter it fell to 8.9% (Figure 7)Footnote 13^[13].

• From August 2024, inflation returned to within the BCH's tolerance band. Lower food and fuel prices were key to this outcome.
• The BCH also calculates core inflation, which excludes volatile items (such as fuels) and reflects persistent demand-side pressures, making it a key reference for monetary policyFootnote 14^[14].
• Unlike headline inflation, core inflation has not eased significantly over the past two years, which raises questions about the role that monetary policy measures played in reducing headline inflation.

Three factors may help explain why this indicator has not yet eased:

• Although higher interest rates and slower credit growth should have restrained demand, public consumption and investment — partly driven by public-sector projects — partially offset the slowdown in private consumptionFootnote 15^[15]. Because public spending and investment are programmed in advance, they tend to be less sensitive to changes in market conditions (Figure 9).
• The minimum wage negotiated for 2024 and 2025 rose by more than the inflation recorded in those years. These wage increases may have generated cost pressures that firms passed on to final prices, sustaining core inflation despite the restrictive monetary policy measuresFootnote 16^[16].
• Finally, the recent depreciation of the exchange rateFootnote 17^[17] raised the cost of imported goods and pushed up production costs.

• While headline inflation returned to the tolerance band, core inflation did not ease significantly. This suggests that the BCH's monetary policy measures may have had a limited impact, or that other factors (public spending, minimum wages, the exchange rate) may have offset their effects. The inflationary uptick in November 2025, though attributed to transitory factors, reinforces this reading.
• This situation reinforces the need — already identified by the BCH itself in its commitment to the IMF — to improve understanding of how the monetary policy transmission mechanism works in Honduras: its channels, its effectiveness, its lags, and the financial system's response to TPM changes. Without this deeper knowledge, it is difficult to properly calibrate the size and timing of necessary adjustments.

The BCH justified the TPM adjustments on two grounds: containing inflationary pressures and protecting international reserves. This Infobyte focuses on the first of these objectives, leaving open the question of how effective these measures were in strengthening the country's external position.