Monetary Policy Rate Decreases: Have They Worked?

For the Central Bank of Costa Rica, the constant reductions in the Monetary Policy Rate that have taken place since March 2019 have been gradually and incompletely transferred to the interest rates of the financial system.

Tuesday, March 3, 2020

At the end of January this year was the last reduction of the monetary policy rate, in this case from 2.75% to 2.25%. For this occasion, the Central Bank argued that the drop was made because by 2020 and 2021 inflation is expected to remain within the target range.

According to the document prepared by the Central Bank and called "Commentary on the national economy for February 2020", the transmission of monetary policy is in process.
 
The analysis details that "... Considering the space to apply monetary measures to support economic reactivation, since the end of March 2019 the Central Bank has lowered its Monetary Policy Rate on eight occasions, which to date accumulates 300 base points and, in a complementary manner, as of June it reduced the minimum legal reserve requirement (and liquidity reserve) for operations in colones.

These actions have been transferred gradually and still incompletely to the interest rates of the financial system. Between March 2019 and February 2009 (as of February 19), negotiated passive interest rates rose from 7.6% to 5.8%, while active rates increased slightly from 13.4% to 13.7%, but this was due to the fact that in that period the structure of credit issuance changed in favor of activities with higher interest rates (consumer and credit cards).

Additionally, part of the resources freed up by the reduction in the legal reserve rate remained deposited in the Central Bank.
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More on this topic

Costa Rica: Monetary Policy Rate Drops to 2.25%

January 2020

Arguing that in 2020 and 2021 inflation is expected to remain within the target range, although below its average value of 3%, the Central Bank reduced the monetary policy rate from 2.75% to 2.25%.

Over the next two years, the central bank's monetary policy will continue to be aimed at keeping inflation low and stable and supporting economic activity, in line with the counter-cyclical stance it adopted from March 2019, reported the Central Bank of Costa Rica (BCCR).

Expectation for Changes in Monetary Policy

September 2019

Although the downward adjustments made months ago in the bank reserve and monetary policy rate do not yet appear to have had an effect on the loan portfolio in Costa Rica, banks expect credit to be reactivated soon.

At the beginning of June, the Central Bank reduced from 15% to 12% the minimum legal reserve rate that banks must maintain as a reserve, arguing that the objective was to make credit more dynamic.

Pressure on Interest Rates

November 2018

Because of the adjustments made by the Central Bank to interest rates in recent days, financial institutions in Costa Rica will be forced to raise interest rates on savings in local currency.

Arguing that forecasts suggest that inflation in 2019 could be above the upper limit of the target range, on November 1st the Central Bank of Costa Rica (BCCR) decided to raise the monetary policy rate from 5% to 5.25%.

Costa Rica: Base Rate Drops to 6.9%

May 2015

The main reference interest rate for investments and loans continues its downward trend seen in recent weeks, now standing at 6.90%

The rate calculated by the Central Bank of Costa Rica, will remain at 6.90% at least until Wednesday 3 June.

The decline in the indicator is linked to the recent decision of the Central Bank to reduce the monetary policy rate .

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