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Costa Rica Monetary Policy October 2019

Costa Rica: Central Bank unexpectedly cuts rates again in October

At its 30 October monetary policy meeting, the Central Bank of Costa Rica took market analysts by surprise and cut the key policy interest rate to 3.25% from 3.75%. This marked the sixth time the Bank has cut rates so far this year, and leaves it at the lowest level since May 2017.

Inflation slowed to 2.5% in September, down from 2.9% in August, and therefore fell further below the 3.0% midpoint of the Central Bank’s inflation target range of 2.0% to 4.0%. The Central Bank also said that inflation is expected to remain below this midpoint for the remainder of 2019 and that there is an over 50% chance that it will remain below 3.0% in 2020, partly due to disinflationary pressures such as slow economic growth and a high unemployment rate. Moreover, the Central Bank stated the economy is currently operating well below potential and with significant idle capacity, which, coupled with a weak global growth outlook, could see inflationary estimates falling further.

On the international front, the Central Bank noted that the U.S. Federal Reserve cut the federal funds rate by 0.25 percentage points on 30 October, which “widens the space for a countercyclical monetary policy in Costa Rica”.

Looking ahead, the Central Bank of Costa Rica is likely to monitor whether inflation stays within its 2.0%–4.0% target range, and could cut rates further if disinflationary pressures make this difficult. However, the extent to which the Central Bank can continue cutting rates will be limited by whether the Fed continues to adopt a dovish stance too.

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