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Costa Rica Monetary Policy June 2022

Costa Rica: Central Bank carries out fifth consecutive rate hike at June meeting

At its 15 June meeting, the Central Bank of Costa Rica (BCCR) delivered its second 150-basis point hike in less than two months, bringing the monetary policy rate to 5.50%. June’s decision marked the fifth consecutive hike since the start of the tightening cycle in December 2021. Strong economic momentum at the outset of 2022 has provided the Bank with room for maneuver.

The BCCR’s decision is aimed at taming domestic inflation, which at the time of the June meeting had reached a 13-year high of 8.7%. Furthermore, according to a survey conducted by the Bank, inflation expectations are increasingly anchoring above its 2.0-4.0% target: In May, annual inflation expectations reached 6.0%, up from 3.8% in December 2021. This will make it more difficult to bring inflation back within its target range.

While the Bank did not provide a concrete forward-looking statement, it reiterated its commitment to bringing inflation back within its tolerance band. Nevertheless, it acknowledged that inflation would remain above its target range until the end of 2023 and that this would merit stronger anti-inflationary measures—a notably hawkish stance.

Looking ahead, rising domestic production prices, global supply constraints and the prolongation of the war in Ukraine stand in the way of inflation normalization. Consequently, our panel projects additional rate increases through 2022.

Commenting on the outlook, analysts at the EIU stated:

“We expect that the [central bank] will lift the policy rate by a further 200 basis points by the third quarter (to 6%) and then hold it at that level until a mild easing cycle begins in the first half of 2023. […] However, if inflationary pressures last longer than we expect, or if the [the US central bank] tightens monetary policy more aggressively than we project, the BCCR’s own tightening cycle could last beyond the third quarter.”

The next meeting is scheduled for 27 July.

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