QCOSTARICA — If you have loans in colones, you will likely have to pay high interest rates throughout the rest of the year. This because the Banco Central de Costa Rica (BCCR) – Central Bank – is lowering the Monetary Policy Rate (MPR) in dribs and drabs and, with this, the relief in the payment of loans will take longer.
The MPR is an instrument used by the Central Bank to control inflation and, the higher this index is, the higher the interest to be paid on the loans offered by public and private banks.
In 2022, as a result of the war between Russia and Ukraine and the international price of crude oil, inflation shot up to double digits and, with this, the Central Bank raised the MPR from 0.75% to 9%. Since then, this index has been decreasing, but at a very conservative rate, according to experts.
This, regardless of the fact that almost a year of deflation was reported and that it is estimated that this indicator will close at 3% in 2024.
On April 26, a new decrease of 50 basis points was reported to place the monetary policy rate at 4.75%. The next meeting of the board of directors of the Central Bank will not be until June 30 and no large downwards are expected.
On the other hand, it must be taken into account that an eventual change in monetary policy takes several months to materialize in the credit market, so it would arrive after the second semester and with a very limited reduction.
“It is unlikely that debtors will recover their liquidity in the short term, since the monetary policy rate has a lag of three months with respect to the basic passive rate – which is the one set by the banks – and this gives room for “interests can remain high throughout the year,” said Greivin Salazar, an economist at the National University.
The decision of the Central Bank would be affecting the placement of loans and, with it, the generation of jobs.
Likewise, the measure helps keep the colon appreciated against the dollar, which has become a real problem for sectors such as tourism, agriculture, exporters and foreign investment. In some cases, layoffs have been reported due to the reduction in income by 27% due to the exchange rate in just over a year and a half.
The setting of interest rates is closely related to inflation and Róger Madrigal, president of the Central Bank, assures that he is trying to make adjustments to meet his inflation objectives.
Central Bank managers even assured that the changes would be gradual and prudent throughout the year, always assessing the risks required.
On the other hand, a series of risks are being taken into account in order not to lower interest rates so quickly, since there are upward pressures on the prices of raw materials, particularly oil, associated with an intensification of geopolitical tensions, mainly in the Middle East and production cuts in some producing countries.
“The Central Bank has enough margin to continue lowering interest rates, since inflation has had negative data for nine months. The changes that have been made so far will not represent an impact, in fact, they will be felt until the reference rate reaches 3.5%,” Daniel Suchar, financial analyst, told La Republica.
There are several reasons why banks do not lower interest rates at a faster pace.
“The first thing is that the Central Bank in mid-2022 increased the percentage of the minimum legal reserve from 13% to 15%. These are resources for which commercial banks pay interest to depositors, but which are sent to the Central Bank without it paying them an interest rate. This measure increases the cost of clients’ savings deposits, which is the basis for being able to lend. Second, during the period under analysis, a set of new regulations approved by the National Council for Supervision of the Financial System have come into effect that affect the costs of the process of attracting and lending resources,” said Ronulfo Jiménez, economist at the Costa Rican Banking Association (ABC).
Another aspect to take into account is that the banks did not raise the interest rates on loans with the same intensity of the increase in which the Central Bank raised the monetary policy rate.
The Central Bank has been maintaining a timid and slow policy with respect to interest rates and that does not benefit people who have credits in colones, economists say.
