On Wednesday night, the Board of Directors of the Central Bank of Costa Rica (BCCR), agreed to reduce the Monetary Policy Rate (MPR) by 50 basis points to remain at 3.25% per year, from October 31st, 2019. This was reported by the press department of the BCCR.
Additionally, the gross interest rate of one-day deposits (DON) was reduced by 41 basis points, to be set at 1.85% per year, also as of October 31st, 2019.
The measure taken by the Board of Directors of the BCCR is carried out prospectively and based on the analysis of the expected evolution of inflation and its macroeconomic determinants, which includes an analysis of the international and domestic context.
In the external environment, the deceleration of trade flows and world growth prevails, largely as a result of the uncertainty associated with trade tensions between the United States and China and the United Kingdom’s departure from the European Union. Along these lines, the International Monetary Fund (IMF) has been revising downward its global growth projections for 2019-2020, up to 3.0% and 3.4%, respectively, in the October edition of the Report on Economic Outlook,”
they explained.
In the Costa Rican context, economic activity showed a year-on-year growth of 1.6% in August, which implied an acceleration of 0.4 percentage points (pp) compared to June. However, the average growth in the last 12 months was 1.7% , below the estimated potential growth for the Costa Rican economy (3.5%). With this, a negative product gap has been opened and widened; that is, there is idle capacity in the economy.
On the other hand, the general inflation rate was 2.5% last September, 0.4 pp lower than in August, so no effects associated with the implementation of the tax provisions contemplated in Law 9635 as of last July are identified.
Inflation projections place this variable below the midpoint of the target range for the remainder of 2019, and with a probability greater than 50% of remaining below that level in 2020, according to the Central Bank. That is why the institution believed that a new reduction in the MPR would support the economic recovery process shown by the production indicators, without jeopardizing the objective of keeping inflation low and stable.