Costa Rica: Inflation breaks downward trend
November 2, 2010
In October, consumer prices increased 0.47% over the previous month, which contrasted the 0.08% price drop registered in September. According to the National Statistics Office (INEC, Instituto Nacional de Estadistica y Censos), higher prices for housing (+1.84% month-on-month) as well as for food and non-alcoholic beverages (+1.08% mom) drove the monthly increase. As a result of the monthly price rise, annual inflation rose from 5.0% in September to 5.3% in October, after dropping for three consecutive months. At the current level, the figure is above the Central Bank's 5.0% inflation target. Meanwhile, the core inflation index, which smoothes out short-term fluctuations of the consumer price index, added 0.17% in October, pushing annual core inflation down from 2.9% in September to 2.7%. At the latest policy meeting on 20 October, the Board of the Central Bank of Costa Rica decided to cut the policy rate by 100 basis points from 7.50% to 6.50%, which represents the lowest level since May 2008. The Bank stated that the loosening of monetary policy conditions reflected a decline in medium-term inflationary pressures and the need to move to a monetary policy regime, in which the interest rate plays a more important role as a policy tool. While the Central Bank did not mention the persistent appreciation of the currency as a motive for the rate cut, the decision will help to stem the strengthening of the colon, as lower rates should slow capital inflows from investors seeking higher yields in developing markets. According to the Revision of the Macroeconomic Program 2010-2011 from July, the Central Bank maintains an inflation target of 5.0% for this year and 4.0% for 2011, both with a tolerance margin of 1 percentage points.