Thursday, January 27, 2022

Costa Rica raises rate 2nd time and sees more hikes

      Costa Rica's central bank raised its main interest rate for the second month, saying the risks to inflation remain titled to the upside and it expects to continue to raise the rate gradually to reach a neutral monetary policy stance.
     The Central Bank of Costa Rica (BCCR) raised its policy rate by another 50 basis points to 1.75 percent and has now raised it 1 percentage point following the rate hike in December and today.
    "With these adjustments, the monetary policy stance of the Central Bank remains expansive, but is approaching a position of neutrality," the bank's board of directors said.
     The monetary tightening cycle in Costa Rica now under way follows 11 rate cuts totaling 4.50 percentage points from January 2019 through the COVID-19 pandemic until June 2020 after which then rate was maintained at 0.75 percent until December last year.
     Inflation in Costa Rica is relatively mild compared with many other countries and at 3.3 percent in December, it remains within the bank's target range of 3.0 percent, plus/minus 1 percentage point.
     "Although the projected inflation is within the tolerance range, given the upward risks in the inflation projections, the Board of Directors considers it opportune to continue with the normalization process of the TPM and to gradually and orderly move it to a neutral position" to maintain inflation within the tolerance range in a 24-month horizon," BCCR said.
     The central bank expects headline and core inflation to remain within its tolerance range in 2022 and 2023 but said it could top the range in the first half of this year and the risk to its forecast are tilted to the upside.
     BCCR pointed to four reasons for these upside risks, including producer prices, which rose 13.9 percent in December. With declining slack in production there is a greater probability higher prices being passed onto consumer prices.
     Secondly, although 12-month inflation expectations were only 1.1 percent in December, surveys of financial analysts and businesses showed expectations in the upper limit of the tolerance range of 3.8 percent. 
     Thirdly imported inflation has been growing and is persistent and if it continue to rise this could affect inflation expectations. Fourthly, wage pressures could rise as production improves.
     In line with the improvement in the international economy, Costa Rica's economy has recovered better than expected, BCCR said, pointing to the trend in the monthly index of economic activity - which rose 9.8 percent in November - and strong economic growth in the second half of 2021, which has resulted in the negative output gap being close to eliminated.
     Costa Rica's gross domestic product grew 10.29 percent year-on-year in the third quarter of last year, up from 9.81 percent in the second quarter.
     In addition to the hike in the monetary policy rate, BCCR said it would return to a symmetrical interest rate corridor in its liquidity operations and this puts the rate on its permanent credit facility at 75 basis points above the policy rate and the rate on its permanent deposit facility at minus 75 points.


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