Costa Rica: Central Bank keeps rates unchanged in November despite slowing inflation
November 20, 2019
At its 20 November monetary policy meeting, the Central Bank of Costa Rica left the key policy interest rate unchanged at 3.25%, keeping it at its lowest level since May 2017. The Central Bank based its decision on the fact that it has already reduced the interest rate six times so far this year, and will monitor the effects of those reductions before doing so again.
The fundamentals, meanwhile, gave mixed signals about the need for another rate cut in November. On the one hand, inflation slowed for the second consecutive month (October: 2.1%; September: 2.5%), falling further below the 3.0% midpoint of the Central Bank’s target range of 2.0% to 4.0% and indicating there could be room for further rates cuts. On the other hand, according to the Central Bank, businesses and consumers generally expect inflation to average close to the 3.0% target range midpoint over the next 12 months, suggesting a rate cut might not be urgently required. Moreover, economic activity growth has improved recently, suggesting recent rate cuts are already stimulating activity.
Looking ahead, the Central Bank is likely to monitor whether inflation stays within its 2.0%–4.0% target range, and could cut rates further if this does not appear likely to transpire. However, the extent to which the Central Bank can continue cutting rates will be limited by whether the U.S. Federal Reserve keeps its rate low or not: If the Fed increases interest rates, it will be harder for the Central Bank of Costa Rica to lower its rates.
Author: Edward Gardner, Economist