Costa Rica: Central Bank raises policy rate from its record low in December
December 15, 2021
At its last meeting of the year held on 15 December, the Central Bank of Costa Rica (BCCR) raised the monetary policy rate by 50 basis points to 1.25% from its record low of 0.75%—where it had been since June 2020.
The Bank noted robust economic growth in recent months, but mainly cited concerns over persistent global supply chain bottlenecks as potential drivers of further increases in price pressures. Although economic activity lost steam in November, it nevertheless grew firmly amid robust performances across multiple sectors—with the Bank remarking that the output gap is continuing to narrow. Meanwhile, inflation hit a five-year high of 3.4% in the same month, putting it closer to the upper bound of the Bank’s 2.0%–4.0% target band. Lastly, worries that rising producer prices could be shifted to consumers further cemented the BCCR’s decision to raise the rate.
Going forward, the president of the Central Bank, Rodrigo Cubero, highlighted that although inflation expectations remain within a reasonable range, this would nevertheless be the start of a monetary tightening cycle, stating that “the Board of Directors of the Central Bank considered it appropriate to start a process of gradual increases in the rate of monetary policy to approach it in an orderly manner to a neutral position”. Thus, the majority our panelists see rates rising to some degree through 2022.
Echoing this stance, analysts at the EIU remarked:
“We expect the policy rate to end 2022 at 2.0% (still negative in real, inflation-adjusted terms) and then to rise moderately in 2023–2026, with rates positive (but low) in real terms. This will help to keep inflation well within the BCCR's 2.0%–4.0% target band throughout 2022–26. Given that Costa Rica's international reserves are limited, substantial colón weakness could result in faster monetary tightening than we currently expect, which would hinder the economic recovery.”
The next meeting is scheduled for 26 January.
Author: Jonuel Pérez, Junior Economist