Costa Rica's BCCR To Continue Its Hiking Cycle Through End-2022

• The Banco Central de Costa Rica (BCCR) is expected to continue its rate hiking cycle at its upcoming meetings, bringing the benchmark rate to 8.50% by end-2022, in an effort to tame a sharp surge in inflation.
• This is an upward revision of the previous forecast of 5.00%. After cutting the policy rate to a low of 0.75% after the outbreak of the COVID-19 pandemic, the BCCR began a rate hiking cycle in December 2021 as inflation began to rise.
• Inflation is expected to moderate in H2 2022 to 7.9% by end-2022, as supply chain disruptions improve and commodity prices come down from recent highs. Nevertheless, given that this remains far above the BCCR’s target range of 2.0% to 4.0%, at 10.1% in June 2022, and the risk that inflation expectations could become increasingly unanchored, notably, the BCCR will continue to respond with further rate hikes. 
• Commodity price growth is expected to ease into 2023 as disruptions that have driven up import prices through H1 2022 ease, interest rate hikes filter through the economy, and base effects become more favourable. That said, the inflation and policy rates are expected to average 6.0% and 7%, respectively, by end-2023.

(Source: Fitch Solutions)