QCOSTARICA (La Nacion) Since last December, the Central Bank began to adjust its monetary policy rate upwards to prevent the increase in inflation from continuing in the future, which was seen favorably given the current situation.
However, as the increases advance, so do the questions, although there are those who support the measure applied by the monetary authority.
The last adjustment was on September 14, when the Board of Directors of the Banco Central de Costa Rica (BCCR) – Central Bank – unanimously agreed to raise the indicator for the seventh consecutive time since December 2021.
This time, it went from 7.50% to 8.50% and with this it accumulates an increase of 7.75 percentage points since last December.
The increase in the monetary policy rate has an impact on the rest of the interest rates in the financial system, making loans more expensive and slowing down consumption, thereby lowering the pressure on prices, which is the objective.
However, the rise in the rate also makes new investment projects that could generate employment more expensive at a time when Costa Rica still maintains a high unemployment rate (11.8% in the quarter ending in July 2022).
The Central Bank acknowledges, in the press release where it announced its latest adjustment, the negative effects, although it considers that the extra dose of bitter medicine is necessary.
“The Central Bank is aware of the effect that the increases in the MPR (monetary policy rate) have on the interest rates of the financial system and, consequently, of the implications that they generate in the short term on the demand for loans, income available and economic activity,” indicated the Central Bank.
“For this reason, it seeks the convergence of inflation to low levels and at the lowest possible cost in terms of economic growth, for which it is necessary to act prudently, but firmly, in reducing the persistence of high levels of inflation,” it added.
The consumer price index (CPI), used to measure inflation, reached 12.13% last August, which, according to the Central Bank, will be the maximum point reached. Their models project that this indicator would return to the tolerance range (between 2% and 4%) around the goal by mid-2024.
The economists Luis Liberman, former banker (Banco Interfin and Scotiabank), former Vice President of Costa Rica and partner of Economic and Financial Consultants (Cefsa); Norberto Zúñiga, partner of the Ecoanalysis firm and the Central American Academy, and Juan Robalino, director of the Institute of Research in Economic Sciences of the University of Costa Rica (UCR), expressed some reasons why they consider that the dose to face high inflation could be being excessive.
The first argument by Liberman is that the Central Bank had been a little behind in making the adjustments in the rate and the premium for saving in colones (the gain compared to saving in dollars), was negative and this was encouraging the passage of savings to dollars.
“Today the premium for saving in colones is important, it is almost 2.5%, and then that problem no longer exists,” said Liberman, who added that the inflation suffered by the country is mainly imported, although it also there are climatic reasons; but monetary policy does not help much on these two issues.
“It seems to me that perhaps this latest increase was greater than I would have thought, and perhaps even unnecessary,” Liberman said when asked by La Nación.
In addition, the prices of raw materials are falling; so is the dollar, and expectations of devaluation in the next 12 months are low (in August the average was 2.7% for the next 12 months), all of which helps reduce domestic prices. Yes, he warned that there is an unpredictable issue, which is the war in Ukraine.
“With these expectations of devaluation, with the reward for investing in colones at the levels it is, I honestly would have waited a little longer to take any action. In particular, those changes of one percentage point seem to me to be very abrupt. I liked it more when the Central Bank acts little by little as it needs to. 1% is a pretty big hit,” Liberman said.
Norberto Zúñiga, for his part, cited a series of price indicators that show that inflation has already begun to slow down and therefore there was no need to further increase the monetary policy rate.
He cited, for example, that the consumer price index grew 0.86% in August, the lowest since last February. Core inflation (which reflects the medium-term trend) increased by only 0.25% in August, the lowest in the last year. The producer price index for manufacturing (which reflects costs for companies) decreased 0.69% in August and the international price index for imported raw materials also fell in July and August.
“Since monetary policy is prospective, if the Central Bank used all the indicators mentioned and that it also publishes, it might not have increased the MPR again, which could affect economic activity, employment and, eventually, even the financial system,” Zuniga said.
For his part, Juan Robalino explained that fuel prices, which have played an important role in the high level of inflation, are already falling as a result of the reduction in the international price of oil, and a decrease was observed in the first week of September, and more were announced.
“I understand that the main objective of the Central Bank is to reach its goal as soon as possible, but I think that on that path, and the way things are, the effects that this measure is going to have on production and employment could be balanced,” considered Robalino.
For his part, José Luis Arce, director of FCS Capital, asserted that although there are reliefs in international prices of raw materials, local inflationary expectations continue to increase and despite the fact that lower inflation is estimated in the future, as also indicated by his models, it is a very big risk that expectations at 12 and 24 months continue to rise in August.
“We must avoid falling into the Manichaean argument that the Central Bank is choosing between inflation and growth. That is false. Inflation is a very high risk and unfortunately the secondary effect of combating it is a slowdown, there is no other way”, said Arce.
Arce recalled that the Central Bank has instruments to try to ward off inflationary pressure, mitigating the cost of growth. “They’re not perfect, but they are,” Arce said.
The next monetary policy meeting set in the Central Bank calendar is for October 26, 2022.
Read the original report, in Spanish, in La Nacion.