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Costa Rica holds rate, inflation still seen below target

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     Costa Rica’s central bank left its policy rate steady and said it considers it necessary to maintain a loose monetary policy stance to support the economic recovery as long as inflation is expected to remain below its target over the two-year projection horizon.
     The Central Bank of Costa Rica (BCCR) left its monetary policy rate at 0.75 percent, unchanged since June 2020 when it was last cut.
    “Thus, the Central Bank continues with an expansive and countercyclical monetary policy stance, which implies low interest rates, supported by a loose aggregate liquidity,” BCCR said after releasing its policy statement on Sept. 15, the day after the board meeting on Sept. 14.
     BCCR has been in a monetary easing cycle since March 2019 and has cut its rate 10 times and by a total of 4.50 percentage points since then, including three cuts last year by 2.0 percentage points.
     Inflation in Costa Rica has remained low this year and only rose to 1.72 percent in August from 1.4 percent in July and the central bank said it is currently forecasting that inflation will remain below its 3.0 percent target over the next 24 months.
     BCCR said it had decided to maintain the policy rate today in the context of low current and projected inflation, a negative output gap and a still high unemployment rate.
     But Costa Rica’s economic recovery is continuing, with the monthly index of economic activity (IMAE) up 10 percent year-on-year in July and production is now at pre-pandemic levels.
     But there is still spare capacity and while unemployment has come down from 24 percent in the second quarter of last year, it remains at historically high levels of 18.1 percent in the second quarter of this year.
     In the first quarter of this year, Costa Rica’s gross domestic product shrank by 1.3 percent year-on-year, better than a 4.4 percent contraction in the previous quarter.
     In its forecast from July, BCCR raised its outlook for growth this year to 3.9 percent from an earlier forecast of 2.9 percent and the 2022 forecast to 3.7 percent from 3.6 percent.
     By the fourth quarter of this year, BCCR expects national output to exceed the output in the fourth quarter of 2019.


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