Monetary policy includes a set of actions taken by any central bank to influence the amount of money available in the economy and, consequently, the interest rates, aimed at promoting price stability.
Monetary Policy
In Costa Rica, the primary objective of the Central Bank is to maintain low and stable inflation levels. In this regard, all the monetary policy provisions are ruled by the Organic Law of the Central Bank of Costa Rica (Law 7558).
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The InflationTargeting Framework
In January 2018, the BCCR officially adopted an inflation targeting framework to operate its monetary policy and reaffirmed its commitment to achieving an inflation rate of 3% ± 1 percentage point over the medium term.
An inflation targeting framework is characterized by institutional commitment to price stability as the primary objective of the monetary policy, as well as public and specific definition of a numerical inflation target for the medium term, decision-making based on prospective analysis of available information, communication with the public and markets regarding the goals and decisions by the monetary authorities, and accountability by the central bank with respect to the compliance of the established target.
The BCCR’s main instrument for influencing inflation is the Monetary Policy Rate (MPR), which, as of 2026, is reviewed six times per year within the framework of the monetary policy meeting schedule as approved by the Board of Directors and published on the Bank’s website.
When the BCCR identifies future price pressures that could lead to a deviation of the inflation from the set target, it will adjust the MPR in the required direction to influence the cost of financing for financial intermediaries. These, in turn, will adjust the interest rates offered to the public. The result is an effect on households and businesses’ consumption, saving, and investment decisions, i.e., the aggregate demand, which ultimately impacts on price behavior.
Given that this process takes time to materialize, monetary policy acquires a prospective nature. That means that it is adjusted based on the projected evolution of inflation and its determinants. Therefore, decisions are made in the present to influence the path of inflation over the coming months.
Transparency and accountability are key under the inflation targeting framework, as the goal is to get economic agents to understand the reasons why the Central Bank adjusts its monetary policy in pursuit of its objective, thereby supporting expectations creation and the effectiveness of its policy.
To explain its decisions, the Central Bank publishes reports and press releases such as the Monetary Policy Report, issued four times a year (January, April, July, and October). These reports analyze the economic situation, explain the measures adopted, and provide the Bank’s projections for inflation, output, and other macroeconomic variables.
Why a 3% Target?
The control of inflation does not imply placing this indicator around an arbitrary value. Considering that the country is a small and open economy, both commercially and financially, and an importer of raw materials, the BCCR determined that the level Costa Rica could aspire to was one consistent with the inflation rates of its trading partners. This implies that costs and prices in the economy grow at a rate similar to those in the mentioned countries.
Inflation above that level over a long period would reduce households’ purchasing power, thus negatively affecting economic growth and the population’s well-being. Likewise, persistent inflation below that level could imply lower output and employment growth.
In addition, if inflation remains very close to zero or is negative for a long period, inflation expectations are also likely to reach such levels. In this regard, further reductions in the monetary policy rate by the central bank would be less effective in stimulating the economy.
The target level is reviewed periodically, in accordance with international best practices, and may be adjusted based on technical criteria, which would be communicated to the public promptly