Costa Rica: Monetary Policy Rate Falls to 4.75%

Arguing that the rise in international commodity prices and the redefinition of the basic tax basket could put upward pressure on inflation, the Central Bank reduced the Monetary Policy Rate to 4.75%.

Thursday, May 23, 2019

This is the second reduction made by the Central Bank of Costa Rica (BCCR) so far this year, since at the end of March it decided to reduce the monetary policy rate from 5.25% to 5%.

See "Monetary Policy Rate goes Down to 5%"

From the BCCR statement:

San José, 22 May 2019. The Board of Directors of the Central Bank of Costa Rica, in session of May 22, 2019, agreed to reduce the Monetary Policy Rate (MPR) by 25 basis points, to place it at 4.75% annually, starting May 23, 2019.

In its decision, the governing body took into account both the factors that would temporarily push inflation up and those that would push it down. Among the former were considered the increase in international prices of raw materials and the changes associated with the redefinition of the basic tax basket and fiscal reform.

On the other hand, the forces that would pressure inflation downward identified the low rhythm of economic activity, which results in a negative product gap; an unemployment rate significantly above that which would be coherent with stable inflation; and a low credit growth rate.

The inflation forecast models of the Central Bank indicate that, as a consequence of the interaction of those forces, the inflation would remain in the remainder of 2019 and in 2020 around the central point of the target range, established at 3% ± 1 percentage point (in other words, from 2% to 4%). However, the forecast models suggest that the deflationary risks that result from the low current economic growth rhythm and the high unemployment rate surpass the risks to the rise in inflation. That is, the risks for the inflation forecast are biased toward the decline.

Based on these considerations, and on the fact that the monetary policy actions act with a delay on inflation and must therefore be based on the inflation forecast, the Board of Directors of the Central Bank took the decision to reduce the Monetary Policy Rate by 25 base points.

Additionally, it was agreed to reduce the gross interest rate of the one-day term deposits (DON) by 19 base points, to place it at 2.85% annually, also as of May 23, 2019.

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