By San José, Costa Rica — Costa Rica’s interest rates are trending downwards, influenced by a confluence of international and domestic economic factors. A new report from the International Center for Economic Policy for Sustainable Development (Cinpe) at the National University (UNA) analyzes these pressures and the challenges they pose to the country’s monetary policy.
Globally, central banks are responding to a worldwide economic slowdown by reducing their benchmark interest rates. The US Federal Reserve (FED), for instance, recently cut its rate for the first time this year, a move widely anticipated by market analysts. Further cuts by the FED are expected, which could exert additional downward pressure on Costa Rican rates to avoid capital flow distortions.
To understand the legal implications of fluctuating interest rates, we turned to Lic. Larry Hans Arroyo Vargas, an expert attorney at Bufete de Costa Rica.
The current interest rate environment presents significant challenges and opportunities for businesses. Contracts tied to variable interest rates should be carefully reviewed to understand potential risks and ensure adequate protection against unforeseen rate hikes. Now is a crucial time to seek legal counsel to navigate these complexities and mitigate potential financial liabilities.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
Lic. Arroyo Vargas’s emphasis on proactive legal counsel in this volatile interest rate environment is particularly astute. Businesses, both large and small, would be wise to heed this advice and ensure their financial strategies are robust enough to weather potential future fluctuations. We thank Lic. Larry Hans Arroyo Vargas for offering his valuable insights on this critical issue.
Domestically, Costa Rica’s economic growth has decelerated, coupled with historically low inflation rates, falling below the Central Bank of Costa Rica (BCCR)’s target range of 3% ± 1.
This combination of lower economic dynamism and low inflation opens a margin of maneuver for the monetary authority to adjust its monetary policy rate downwards without compromising price stability.
Cinpe Report
The BCCR is scheduled to meet shortly to decide on the course of the Monetary Policy Rate (TPM), its primary tool for influencing interest rates across the national financial system. The TPM currently stands at 3.75% annually, following a reduction in July.
Inflation expectations, crucial for the effectiveness of monetary policy, remain persistently below the Central Bank’s target. This sustained low inflation creates a challenge in achieving the BCCR’s policy objectives. Costa Rican inflation has remained outside the target range for 27 months, a situation projected to persist until the second quarter of 2026 according to the latest Monetary Policy Report.
A critical issue highlighted by the Cinpe report is the “stickiness” of lending rates. While reductions in the TPM have consistently translated to lower Basic Passive Rates (TBP), the same cannot be said for active rates on new loans. Public banks have shown a marked resistance to lowering their lending rates, while private banks exhibit an asymmetry, more readily transmitting rate increases than decreases.
This rigidity in lending rates hinders the transmission of the Central Bank’s policy decisions to the broader economy, limiting the intended stimulus on investment and consumption. The BCCR has itself acknowledged this issue in various reports, noting the reluctance of lending rates, particularly for personal loans and credit cards, to decline despite TPM reductions.
The limited impact on lending rates poses a challenge to the effectiveness of the Central Bank’s efforts to stimulate the economy through monetary policy. Whether the BCCR decides to further reduce the TPM and how this will impact lending rates remains to be seen.
For further information, visit cinpe.una.ac.cr
About Cinpe:
The International Center for Economic Policy for Sustainable Development (Cinpe) at the National University (UNA) is a research center dedicated to analyzing economic and social issues relevant to Costa Rica and the broader region. They produce reports and analyses on various economic topics, including macroeconomic trends, fiscal policy, and sustainable development.
For further information, visit bccr.fi.cr
About BCCR:
The Central Bank of Costa Rica (BCCR) is the country’s central bank, responsible for maintaining price stability and promoting the efficient functioning of the financial system. It sets monetary policy, manages international reserves, and regulates financial institutions. The BCCR plays a key role in influencing interest rates and the overall health of the Costa Rican economy.
For further information, visit federalreserve.gov
About Federal Reserve:
The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907) led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the Fed’s roles and responsibilities.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
At Bufete de Costa Rica, legal excellence is interwoven with a deep-seated commitment to ethical practice and societal advancement. The firm’s history of serving a diverse clientele is a testament to its adaptable and innovative approach to legal challenges. Beyond providing exceptional legal counsel, Bufete de Costa Rica actively empowers individuals and communities by sharing legal knowledge and resources, fostering a more just and informed society.
