by Óscar Rodríguez & Esteban Ramírez

The Board of Directors of the Central Bank of Costa Rica (BCCR) unanimously decided to lower its monetary policy rate (MPR) to 4.75% starting from Friday, from the 5.25% level it had been at since the end of last March. The directors indicated again that they will seek monetary policy neutrality to the extent that macroeconomic conditions allow.

Róger Madrigal, president of the institution, explained that the directors’ decision was unanimous and the 50 basis points reduction is due to the recognition that there is room because negative inflation persists in the country. In March, the Consumer Price Index (CPI) closed at -1.19%.

The monetary policy rate is one of the tools that the Central Bank uses to influence the economy and therefore also affects your savings, loan payments, and even what you consume. It is also referred to as the “reference rate”.

Among the considerations, the Central Bank estimated that the return to positive values for year-on-year inflation in Costa Rica will begin in the second half of 2024, and that entry into the defined inflation tolerance range (between 2% and 4%) would occur in early 2025.

“The information available to date, observed and prospective, indicates that there is room to reduce the MPR to a level close to a neutral stance. On this occasion, the assessment of risks that could deviate inflation from the projected path shows a downside bias in the short term, risks that would tend to balance out over the medium term,” the Board stated in its resolution.

Among the highlighted downside risks are weaker economic performance from Costa Rica’s main trading partners, due to the effects of a more extended restrictive monetary policy. Internally, a slower and less significant transmission of changes in the MPR to active interest rates is also noted.

However, the directors of the monetary authority also highlighted other increasing risks, such as supply shocks and global trade fragmentation, as well as the disorderly reshuffling in the local portfolio of financial instruments, resulting from a persistent difference between interest rates by currency, which could lead to a sudden increase in exchange rate expectations and consequently inflation expectations.

Reference