Brake to Monetary Policy Rate Reduction

After lowering the rate six times between January and October of this year, in its last review the Central Bank of Costa Rica decided to maintain it at 3.25%, because the inflationary rate registers a significant slowdown.

Monday, November 25, 2019

The last reduction made to the Monetary Policy Rate (MPR) was at the end of October, when the Central Bank of Costa Rica (BCCR) reduced it from 3.75% to 3.25%, arguing that the reduction would support the incipient economic recovery process shown by production indicators.

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The BCCR informed that in session dated November 20, 2019, it agreed to maintain the level of the TPM, decision that was sustained in the analysis of the forecast trajectory for inflation and its determinants, the risks in that forecast, and the delay with which the monetary policy measures have effect.

"In October 2019 the general inflation, measured by the year-on-year variation of the Consumer Price Index, was of 2.1%. This marked the second consecutive month of significant deceleration in inflation, after the increase registered in July and August (at a rate of 2.9% in both months) as a consequence of the entry into force of the value added tax. The deceleration of inflation was affected, to a greater extent, by the fall in the prices of agricultural goods, fuels and electricity. Core inflation showed a similar evolution, and last October it stood at 2.4% (year-on-year). The reduction in general and core inflation suggests the persistence of disinflationary forces in the economy," explains the statement.

Another element to be considered by the Board of Directors is that the Monthly Economic Activity Index, in its trend cycle series, registered in September 2019 an interannual growth of 2.0%, the highest rate observed since November 2018, and reached the fourth consecutive month of recovery.

The BCCR report concludes that "... Given that the transmission of these adjustments to the rest of the interest rates of the financial system takes time, the Board of Directors considered it prudent on this occasion to maintain the TPM at its current level, and thus have more time to carefully analyze the impact that the reductions agreed so far are having on the monetary and credit aggregates and on other determinants of future inflation."

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From the statement of the Central Bank of Costa Rica:

November 1st, 2018. The Board of Directors of the Central Bank of Costa Rica (BCCR), in the session of October 31st, 2018, decided to increase the monetary policy rate (TPM) by 25 basic points to 5.25% annually. The Board of Directors also agreed to increase the gross interest rate on one-day deposits (DON) by 19 basis points to 3.23% annually. Both increases are in effect from November 1st, 2018.