Costa Rica's BCCR To Continue Hiking Through The End Of 2022

• Fitch Solutions has revised its end-2022 interest rate forecast for Costa Rica to 9.25%, from 8.50% previously, as the Banco Central de Costa Rica (BCCR) has hiked its benchmark rate more aggressively than anticipated to 8.50% in September up from the 7.50% in July.
• The bank is expected to continue its hiking cycle at its final two meetings of the year, albeit at a slower pace, increasing the rate by 50bps on October 26 and 25bps on December 14, bringing the rate to 9.25% by end-2022, before pausing. Importantly, inflation slowed markedly in September to 10.4% y-o-y, from 12.1% in August, largely due to softer increases in food and fuel prices.
• The deceleration in inflation in September was mirrored by a decline in inflation expectations, with 12-month ahead inflation expectations in the BCCR’s survey slipping from 9.9% in August to 7.9% in September, while 24-month ahead expectations fell from 8.5% to 6.1%.
• Inflation is expected to gradually cool in 2023, averaging 6.3% and reaching 4.8% by the end of the year, due to base effects, improving supply chains, a moderation in commodity prices and the BCCR’s rate hikes. However, it will remain elevated compared to the historical inflation average of 1.3% from 2015-2021, and above the BCCR’s 2.0%-4.0% target range.
• Fitch expects that the BCCR will likely begin to lower the rate in H2 2023, to support economic growth as inflation and expectations moderate further, though inflation will not come down fast enough to allow for more aggressive rate cuts.
• Risks to Fitch’s view remain to the upside in the remainder of 2022, but in 2023 the risk is that the bank cuts more aggressively than forecast if Costa Rican growth drops sharply.

(Source: Fitch Solutions)