The Central Bank of Costa Rica (BCCR) announced an increase in the benchmark interest rate by 100 basis points, to 6.25%. This decision was made in response to the high inflation that is being registered in the country, which stood at 8.1% in December 2023.
The BCCR expects that’s the increase in the interest rate will contribute to reducing inflation in the medium term. This is because of a higher interest rate makes it more expensive for business to borrow money, which can reduce production and employment. This, in turn, can lead to lower demand for good and services, which can help to slow inflation.
However, economic analysts warn that the impact of the interest rate hike on inflation may take some time to materialize. This is because current inflation is due to a number of factors, such as high fuel and food prices, which are beyond the control of the BCCR.
Impact on Economic Growth
The increase in the interest rate could also have a negative impact on economic growth. This is because a higher interest rate makes it more expensive for businesses to invest and expand. This, in turn, can lead to lower investment and economic growth.
Economic analysts estimate that Costa Rica’s economic growth could slow down in 2024 as a result of the interest hike.
Impact on Consumers
Consumers will also feel the impact of the interest rate hike. This is because consumers will pay more for loans, such as mortgages, car loans, and credit cards. This could reduce the spending capacity of consumers, which could lead to lower demand for goods and services.
Impact on Savers and Investors
Savers and investors will benefit from the interest rate hike. This is because a higher interest rate increases the value of saving and the returns on investments.
Savers with savings accounts will see their interest earning increase, and investors who purchase bonds and other debt instruments will also see their returns improve.
The BCCRs interest rate hike is necessary measure to curb inflation. However, it could also have a negative impact on economic growth and on consumers.
Mariela Saborío Soto
mariela.saborio@garciabodan.com
Associate
García & Bodán
Costa Rica