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%.

On November 7th the BCCR increased the interest rates on its term deposits. In this case, the entity said that the objective is to promote savings in colones, particularly in longer-term instruments.

Against this backdrop in which the Central Bank raised its rates, explains Carlos Fernandez, former manager of the Bank of Costa Rica, that "... commercial banks cannot be static to movements in interest rates, because otherwise they lose liquidity, lose size, customers and competitiveness. This is because clients can move toward savings in dollars since with an annual devaluation rate of almost 10% and bank interest rates of 2%, they have an attractive return or toward investments in Central Bank colones."

Fernandez detailed that "... Banks are more careful with the increase in passive interest rates of capture, because they have two large additional financial costs. The minimum legal reserve cost of 15% (percentage of deposits that must be transferred to the Central Bank) and the interest tax'. However, if banks increase the passive interest rates of term deposits, they boost up the basic passive rate that affects credit debtors."

Source: Nacion.com

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