QCOSTARICA (La Nacion) Since last December, the Central Bank has started to adjust its key rate upwards to prevent inflation from continuing to rise in the future, which was viewed favorably given the current situation .
However, as the increases progress, so do the questions, even if some support the measure applied by the monetary authority.
The latest adjustment took place on September 14, when the board of directors of the Banco Central de Costa Rica (BCCR) – Central Bank – unanimously decided to raise the indicator for the seventh consecutive time since December 2021.
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This time it went from 7.50% to 8.50% and with that, it racks up a 7.75 percentage point increase since last December.
The increase in the monetary base rate has an impact on the rest of the interest rates in the financial system, making loans more expensive and slowing consumption, thus reducing the pressure on prices, which is the objective.
However, the rising rate also makes new investment projects that can generate jobs more expensive at a time when Costa Rica still maintains a high unemployment rate (11.8% in the quarter ending July 2022).
The Central Bank recognizes, in the press release where it announces its latest adjustment, the negative effects, even if it considers that the additional dose of bitter medicine is necessary.
“The Central Bank is aware of the effect that 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, disposable income and economic activity,” the central bank said.
“For this reason, it aims for 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 cautiously, but firmly, reducing the persistence of high levels of inflation,” he added. added.
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The consumer price index (CPI), used to measure inflation, reached 12.13% last August, which the Central Bank says will be the maximum point reached. Their models forecast that this indicator would return to the tolerance range (between 2% and 4%) around the target by mid-2024.
Economists Luis Liberman, former banker (Banco Interfin and Scotiabank), former vice-president of Costa Rica and associate of economic and financial consultants (Cefsa); Norberto Zúñiga, partner of the firm Ecoanalysis and the Central American Academy, and Juan Robalino, director of the Economics Research Institute of the University of Costa Rica (UCR), expressed some reasons why they consider that the dose to deal with high inflation could be excessive.
Liberman’s first argument is that the Central Bank had lagged a little behind in rate adjustments and the premium to saving in colones (the gain over saving in dollars), was negative and this favored the transition from savings to dollars.
“Today, the savings premium in colones is significant, it is almost 2.5%, and then this problem no longer exists,” said Liberman, who added that the inflation suffered by the country is mainly imported, although there are also climatic reasons; but monetary policy does not help much on these two issues.
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“It seems to me that this last increase was maybe bigger than I would have thought, and maybe even unnecessary,” Liberman said when asked by La Nación.
In addition, commodity prices are falling; the dollar too and devaluation expectations over the next 12 months are low (in August the average was 2.7% for the next 12 months), which helps to reduce domestic prices. Yes, he warned that there is an unforeseeable problem, which is the war in Ukraine.
“With these devaluation expectations, with the reward of investing in colones at current levels, I honestly would have waited a bit longer to act. In particular, these one percentage point changes feel very abrupt to me. liked more that the Central Bank was doing the bit by bit the way it should be. 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 started 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 rose 0.86% in August, the lowest since last February. Core inflation (which reflects the medium-term trend) rose only 0.25% in August, the lowest of last year. The producer price index for the manufacturing sector (which reflects costs for businesses) fell by 0.69% in August and the international price index for imported raw materials also fell in July and August.
“Since monetary policy is forward-looking, if the Central Bank used all the indicators mentioned and 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 due to the reduction in the international price of oil, and a drop has been observed during the first week of September, and more have been announced.
“I understand that the main objective of the Central Bank is to achieve its target as soon as possible, but I think on this path, and as things stand, the effects that this measure is going to have on production and employment could be balanced,” Robalino said.
For his part, José Luis Arce, director of FCS Capital, affirmed that although there are reliefs in international commodity prices, local inflationary expectations continue to rise and despite the fact that a drop in the he inflation is estimated in the future, as also indicated by its models, there is a very big risk that the 12 and 24 month expectations will continue to rise in August.
“We must avoid falling into the Manichean argument that the central bank chooses between inflation and growth. It’s wrong. Inflation is a very high risk and unfortunately the side effect of fighting it is a slowdown, there is no other way,” Arce said.
Arce recalled that the Central Bank has instruments to try to ward off inflationary pressures, by mitigating the cost of growth. “They’re not perfect, but they are,” Arce said.
The next monetary policy meeting scheduled in the Central Bank calendar is October 26, 2022.
Read the original report, in Spanish, in La Nacion.
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