Costa Rica: Central Bank raises policy rate by 200 basis points at July meeting
July 27, 2022
At its 27 July meeting, the Central Bank of Costa Rica (BCCR) raised rates by 200 basis points—the largest hike on record—bringing the monetary policy rate to 7.50%. July’s decision marked the sixth consecutive hike since the start of the tightening cycle in December 2021.
Persistent price pressures and inflation expectations entrenched above the Bank’s target prompted this striking increase. At the time of the July meeting, inflation reached a 13-year high of 10.1% in June. Furthermore, according to a survey conducted by the Bank, inflation expectations are increasingly anchoring above the 2.0–4.0% target band: In June, 12-month-ahead inflation expectations reached 6.6%, up from 6.0% in May and 3.8% in December 2021. This points to the emergence of second-round effects, prompting the more hawkish policy move.
Our panel expects more than 100 basis points of tightening by the end of the year. The Bank stated that it will keep raising its policy rate until at least the neutral level. The increase in inflation expectations beyond the BCCR’s target range in July made it more urgent for the Bank to further tighten monetary conditions, given the potential for second-round effects. U.S. monetary policy, commodity market developments and spillover from the war in Ukraine will continue to influence rates going forward.
Commenting on the outlook, JPMorgan’s Gabriel Lozano noted:
“Going forward, we do not expect BCCR to continue with 200bp-clips; nonetheless, we now regard front-loading as a key strategy in order to anchor long-term inflation expectations and to arrive sooner to a restrictive real-rate stance. Thus, in the September meeting, we expect a 175bp hike to 8.75%. For year-end, we expect the policy rate to stand at 11.25%, with inflation at 11.40%oya [one year ago]. This scenario is strongly dependent on the inflation data for the forthcoming months.”
The next meeting is scheduled for 14 September.
Author: Magdalena Preshlenova , Junior Economist