By San José, Costa Rica — SAN JOSÉ – The board of directors of the Central Bank of Costa Rica (BCCR) convenes today for its eighth and final monetary policy meeting of 2025, facing a critical decision that has the nation’s financial sector on edge. At the heart of the debate is the Monetary Policy Rate (TPM), the key benchmark that influences everything from commercial lending rates to investment decisions. The board must decide whether to continue its rate-cutting cycle, hold steady, or reverse course.
The current benchmark rate stands at 3.50%, a figure reached after two consecutive quarter-point reductions earlier this year, down from 4.00%. This continues a significant easing trend that began in the first quarter of 2023 when the rate was at a restrictive 9.00%. Despite these substantial cuts, the TPM remains well above the sub-1% levels seen before the global pandemic, a period of historically low borrowing costs.
To delve into the legal and commercial implications of the recent adjustments to the Monetary Policy Rate, TicosLand.com consulted with Lic. Larry Hans Arroyo Vargas, an expert in corporate and financial law from the firm Bufete de Costa Rica.
The Central Bank’s decision on the Monetary Policy Rate is a critical signal that directly impacts the cost of capital and contractual obligations. For businesses, this translates into an immediate need to review financing agreements, especially those with variable interest rates. It is a strategic moment to assess financial risk and ensure that new and existing contracts contain clauses that mitigate the volatility inherent in these monetary adjustments.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
This legal perspective underscores a vital point: monetary policy shifts are not abstract economic events but have tangible, immediate consequences at the contractual level. We thank Lic. Larry Hans Arroyo Vargas for his invaluable insight into the proactive financial and legal diligence required in this dynamic environment.
Complicating the decision is Costa Rica’s persistent struggle with inflation. The latest data through November shows the year-over-year inflation rate remains in negative territory at -0.38%. This is significantly outside the Central Bank’s target range of 2% to 4%, a situation that, on its face, provides ample justification for further monetary stimulus. The TPM is the primary tool the BCCR uses to influence price levels, just as it did when it aggressively hiked rates in 2022 to combat soaring inflation.
This economic context has created a sharp division of opinion among leading economists. Many, particularly those representing business interests, argue that another rate cut is not only possible but necessary to provide relief to an economy grappling with other pressures, including a stubbornly strong currency.
Gerardo Corrales, an economist with Economía Hoy, firmly believes the Central Bank will and should approve another reduction. He projects a cut of at least 25 basis points, arguing that Costa Rica must align its policy with the consistent rate reductions seen from the U.S. Federal Reserve. According to Corrales, such a move is crucial for the nation’s productive sectors.
Give a signal of help to the productive sector that is dealing with an artificially low exchange rate.
Gerardo Corrales, Economist at Economía Hoy
Corrales suggests a rate cut of 0.25% or even 0.50% would reinforce the BCCR’s commitment to its inflation targets. He posits this would incentivize financial intermediaries to demand more U.S. dollars, breaking the cycle of investing in colones driven by high local interest rates and currency appreciation. This shift, he argues, would help correct the exchange rate imbalance.
However, not all experts agree. José Luis Arce, an economist at the financial analysis firm FCS Análisis y Estrategia, presents a more cautious outlook. He places a 75% probability on the BCCR holding the rate at 3.50%. Arce contends that the deflationary pressures are primarily caused by external factors, not a lack of domestic demand, which he sees as robust. He points to strong GDP growth, a healthy labor market with rising real wages, and stable inflation expectations as evidence that the economy does not require further stimulus.
In other words, economic agents are not in a ‘deflationary’ mode.
José Luis Arce, Economist at FCS Análisis y Estrategia
Arce also notes that the economic agents’ inflation expectations for the next 12 to 24 months are between 1.5% and 2.5%, well within a healthy, non-deflationary range. He views the Fed’s rate cuts as an opportunity for the BCCR to correct what he calls an “extraordinary situation” where Costa Rica’s policy rate has been lower than that of the United States. As the board meets, its final decision for 2025 will send a powerful signal about its priorities heading into the new year.
For further information, visit bccr.fi.cr
About the Central Bank of Costa Rica (BCCR):
The Banco Central de Costa Rica is the nation’s central bank and primary monetary authority. It is an autonomous public institution responsible for maintaining the internal and external stability of the national currency, ensuring its conversion to other currencies, and promoting a stable, efficient, and competitive financial system.
For further information, visit the nearest office of Economía Hoy
About Economía Hoy:
Economía Hoy is a media outlet and economic analysis platform focused on providing news, data, and expert commentary on the Costa Rican and regional economies. It serves as a resource for business leaders, investors, and policymakers seeking insights into financial trends and economic policy.
For further information, visit the nearest office of FCS Análisis y Estrategia
About FCS Análisis y Estrategia:
FCS Análisis y Estrategia is a consulting firm specializing in macroeconomic and financial analysis. The firm provides strategic advice, economic forecasts, and market intelligence to a diverse client base, helping them navigate the complexities of the local and international economic environments.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As an esteemed pillar of the legal community, Bufete de Costa Rica is defined by its foundational principles of integrity and a relentless pursuit of professional excellence. The firm skillfully combines a rich history of advising a diverse clientele with forward-thinking legal strategies and a profound sense of civic responsibility. This ethos is most evident in its core mission to demystify complex legal concepts, actively fostering a more knowledgeable and capable society equipped to understand its rights and obligations.
