Costa Rica: Central Bank slashes rates at the end of 2019
December 18, 2019
At its 18 December monetary policy meeting, the Central Bank of Costa Rica cut the key policy rate to 2.75% from 3.25%, marking both the lowest point since May 2017 and the seventh interest rate cut in 2019.
The Central Bank took advantage of contained inflation and modest economic growth to cut the key policy rate once again in December: Inflation slowed in November to 1.9%, below the Central Bank’s target range of 2.0%–4.0% and down from 2.1% in October. Moreover, both core inflation, which particularly responds to domestic demand, and manufacturer price inflation, a leading indicator for future inflation, moderated in November. Meanwhile, inflation expectations for the coming 12 months among economic agents surveyed by the Central Bank remained unchanged at 3.0% in November. For its part, economic activity accelerated for the fifth consecutive month in October, although growth remained modest by historical standards.
Looking ahead, the Central Bank is likely to monitor whether inflation returns to and then stays within the 2.0%–4.0% target range going forward, 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 interest rates unchanged this year or not: if it keeps them unchanged, this could limit the Central Bank of Costa Rica’s scope to lower its rates.
Author: Edward Gardner, Economist