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Costa Rica Monetary Policy June 2023

Costa Rica: Central Bank cuts the policy rate by 50 basis points in June

At its 14 June meeting, the Central Bank of Costa Rica (BCCR) cut the policy rate by 50 basis points to 7.00%—the third cut since June 2020. At its previous meeting in April, the Bank had reduced the policy rate by 100 basis points.

The decision came amid a significant slowdown in inflation, which fell in May below the lower range of the Bank’s target of 2.0–4.0%. Moreover, 12-month inflation expectations continued to ease in June, and producer prices continued to slow, likely weakening cost-push inflation. The BCCR now expects headline inflation to stay below the lower range of the target this year and does not rule out that deflation may occur. For 2024, the Bank projects price pressures to accelerate into the target range.

Looking ahead, the BCCR’s forward guidance remained dovish. While the Bank assessed that risks to the inflation outlook are tilted to the upside, it noted that “there is room for the monetary policy stance to be less restrictive”. The BCCR also highlighted the downside risk to inflation related to weaker global growth. Our panelists expect the Bank to cut rates further this year.

On the decision, analysts at the EIU commented:

“[The BCCR said it] believed that risks were tilted towards higher inflation over the medium term (stemming from potential bad weather, prices of raw materials and sticky inflation in other economies). This suggests that the BCCR is more concerned about the risk that cutting interest rates too aggressively will trigger a second inflationary surge”.

The next meeting is scheduled for 26 July.

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