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On Friday, October 31, the Central Bank of Costa Rica (BCCR) presented its October Monetary Policy Report (IPM), which estimates that gross domestic product (GDP) will grow by 4.2% in 2025. This rate represents an upward revision of 0.4 percentage points (p.p.) compared to the estimate in last July's Monetary Policy Report.

For the 2026-2027 biennium, the national economy is projected to grow by an average of 3.6%, driven mainly by domestic demand. In 2026, growth is expected to be moderate (3.5%) due to the slowdown in external demand, following the significant growth recorded in 2025. In contrast, domestic demand is expected to be more dynamic, supported by the expansion of household consumption and the recovery of investment.

In 2027, the economy is expected to grow by 3.8% due to the evolution of domestic demand and the greater contribution of net external demand, given the expected increase in growth among the main trading partners. Over the projection horizon, GDP is expected to be close to its potential, and therefore no significant inflationary pressures associated with excess aggregate demand are anticipated.

Inflation and BCCR monetary policy

During the third quarter of 2025, headline inflation, measured by the year-on-year change in the Consumer Price Index (CPI), returned to negative values (-0.8% on average), which differs from the projection made last July, which placed that result at 0%. Meanwhile, average core inflation stood at 0.4%, lower than the July estimate (1.0%). With these results, overall inflation has consolidated at low and stable levels, which, although consistent with the Central Bank's legal mandate, is recognized as being below its operational target in practice.

The Central Bank's projection models indicate that, for the remainder of 2025 and during the first months of 2026, negative year-on-year values in overall inflation will continue due to the expected evolution in the prices of some agricultural products. Thus, overall inflation would enter the tolerance range around the target in the second quarter of 2027.

Core inflation is expected to remain positive in the fourth quarter of 2025, but to continue the slowdown observed since April of this year. Starting in the first quarter of 2026, this indicator is expected to recover and enter the tolerance range around the target in the third quarter of that year.

These projections incorporate a monetary policy stance aimed at maintaining low and stable inflation.

In this regard, it should be noted that, at its monetary policy meetings in July and September, the BCCR Board of Directors reduced the Monetary Policy Rate (MPR) by 25 basis points (bp) on each occasion, bringing it to 3.5%. At its October meeting, it maintained that reference rate, among other reasons to allow time for those movements to be transmitted to the rest of the interest rates in the financial system. Given the trajectory of inflation expectations, it is estimated that the current level of the MPR is consistent with a neutral monetary policy stance.

The inflation target remains at 3.0% ± 1 percentage point. However, the Central Bank's Strategic Plan envisages continuing the analysis of the components of the current inflation targeting monetary framework, which will reveal the necessary elements that could lead to a rethinking of how the inflation target is formulated or its characteristics.

Local and international economic situation

In the third quarter of 2025, the international economic environment remained highly uncertain due to geopolitical conflict and trade tensions caused by trade barriers announced by the United States (US) and the resulting actions taken by other countries in response, as well as frequent changes in these measures.

Initially, it was expected that these conditions would significantly reduce global economic growth. However, after eight months, statistical evidence shows that the global economic system has been able to adapt more than anticipated when the new tariffs were first imposed. This is partly because economic agents brought forward purchases and accumulated inventories, so that the effect has been relatively modest so far.

The Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) project global economic growth of between 2.9% and 3.1%, below the historical average for the period 2000-2019, before the pandemic, which was 3.7%.

For the United States, our main trading partner, the OECD, the IMF, and its own Monetary Authority forecast growth in 2026 of 1.5%, 2.1%, and 1.8%, respectively. With the exception of the OECD, these projections imply an acceleration compared to their forecasts for 2025 (2.0% and 1.6%, respectively).

As for the country's operations with the rest of the world, in the third quarter of this year, the current account deficit in the balance of payments amounted to USD 303.7 million, equivalent to 0.3% of GDP. The forecast is that by the end of 2025, the current account balance of payments will accumulate a deficit equivalent to 1.1% of GDP, 0.2 percentage points lower than the previous year.

For the 2026-2027 biennium, the current account deficit is projected to average 1.7% of GDP, higher than the estimate for 2025. This increase would be determined primarily by the reduction in the services account surplus, as a decline in the combined goods and primary income account deficit is expected. As has been characteristic of the last two decades, this gap would be more than covered by long-term external savings.

With regard to public finances, at the end of August, the Central Government recorded a primary balance equivalent to 1.1% of GDP and a financial deficit of 2.0%, representing an improvement of 0.2 and 0.5 percentage points, respectively, compared to twelve months earlier. This performance was determined by the decrease in total expenditure, particularly interest payments, and, to a lesser extent, by the growth in tax revenues.

In terms of foreign exchange, in accordance with the provisions of its Organic Law and as it has done to date, the BCCR will participate in the foreign exchange market in order to meet its own requirements and those of the non-banking public sector, as well as to mitigate violent fluctuations in the exchange rate. To the extent that foreign exchange market conditions permit, it will seek to further strengthen the country's financial shield, in accordance with the parameters and guidelines defined by its Board of Directors.

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