On Wednesday, the Central Bank decided to reduce the Monetary Policy Rate (MPR), by 50 basis points, placing it at 2.75% annually as of Thursday.
The BCCR adjusts the MPR as a mechanism to guide financial intermediaries on the direction monetary policy will take in the following months.
In this regard, it is observed that for the third consecutive month general inflation slowed down, reaching 1.9% year-on-year variation (2.1% in October).
On the other hand, the average of the core inflation indicators, which seek to identify medium-term inflationary trends (in particular those that respond to demand pressures), was also reduced at an interannual rate of 2.2% (2.4 % in October). In addition, the manufacturing producer price index, an advanced indicator of inflation, shows a slowdown in its interannual variation since February 2019, to reach a rate of 0.1% in November.
The inflation expectations of 12-month economic agents remain anchored to the midpoint of the Central Bank’s target range, with an average of 3.0% in November. And, based on preliminary information, a similar result is expected for December.
Additionally, in October 2019 the economic activity, measured with the monthly index of economic activity, accelerated for the fifth consecutive month and reached an annual growth of 2.5% . However, the average rate of the last 12 months was 1.7%, lower than the estimated potential growth for the Costa Rican economy (3.5%). This contributes to widening the distance between national production and its potential level, thereby deepening the negative gap of the product (that is, there is a growing slack in production capacity). In addition, the unemployment rate for the third quarter of 2019 was 11.4%, well above the level of long-term unemployment (unemployment gap).
In the external context, a slower pace of global economic growth, coupled with low global inflation, has allowed several central banks in advanced and emerging economies to maintain lax monetary conditions. Inflationary pressures of imported origin are not expected in the coming months.
On the other hand, the Central Bank’s inflation forecast models , especially the underlying indicator, suggest a downward trend in this variable and place it below the midpoint of the 2020 target range.
This reflects the influence of several factors that tend to slow inflation ; among them: the still low level of economic growth and a negative product gap; a high unemployment rate; and a credit to the private sector that continues to grow at very low interannual rates. Similarly, inflation expectations are projected to remain anchored to the goal announced by the Central Bank. These elements open spaces for the Central Bank to continue with countercyclical monetary policy measures.
Based on these considerations , the Board of Directors of the Central Bank decided to reduce its Monetary Policy Rate by 50 basis points (to 2.75%), and thus help inflation gradually return to its target range and support the process of economic recovery without compromising the inflationary objective.
In addition to the reduction in the MPR, the Board of Directors agreed to reduce the gross interest rate of deposits to a one-day term by 41 basis points, to place it at 1.44% per year, as of December 19, 2019.