Costa Rica: Central Bank cuts rates and shakes up its monetary policy in January
February 17, 2020
At its 29 January monetary policy meeting, the Central Bank of Costa Rica (BCCR) reduced the monetary policy rate (MPR) to 2.25% from 2.75%, which marks a near three-year low and the eighth rate cut since last March. The Central Bank also announced measures to improve monetary policy transmission, given that, despite recent MPR cuts, commercial lending fell last September for the first time in nearly nine years, and continued falling through December.
Weak inflation led the decision to cut rates. Inflation inched up to 1.6% in January from 1.5% in December, but remained below the Central Bank’s target range of 2.0%–4.0%, despite economic activity growth accelerating for the seventh consecutive month in December. The Central Bank said both headline and core inflation should average within its target range this year and next year, but will remain below the 3.0% midpoint, while economic growth should accelerate to 2.5% this year and 3.0% in 2021.
The BCCR announced measures to improve monetary policy transmission, including two new interest rates: One that is 1.5 percentage points below the MPR, which will serve for commercial bank deposits at the Central Bank, and one that is 0.5 percentage points above the MPR, which will serve for commercial bank borrowing from the Central Bank. The BCCR also announced a review of its inflation target and committed to releasing more frequent in-house assessments of the economy.
Looking ahead, the Central Bank will monitor whether inflation returns to and then stays within the target range. If this does not appear likely to transpire, the BCCR could well cut rates further.
Author: Edward Gardner, Economist