(Adds more predictions, currency free float.)
By Enrique, Andres and Pretel
SAN JOSE, Feb 2 (Reuters) - Costa Rica’s central bank said it had lowered its main interest rate 50 basis points to 4.75 percent to take advantage of a steep decline in oil prices to help meet its 2015 economic growth target of 3.4 percent.
Costa Rica is an energy importer, so low oil prices allow the central bank to try and raise growth with less risk of stoking inflation, which was 5.1 percent in 2014.
“For the next quarters, we estimate there will not be additional demand pressure on inflation, the exchange rate will continue relatively stable, and we will see the manifestation of the reduction in the price of hydrocarbons,” the central bank said in its macroeconomic projections for 2015-2016.
The rate cut was announced on Saturday, but took effect on Monday. In Saturday’s projections, the central bank set an inflation target of between 3 percent and 5 percent for 2015.
The bank added that it saw the fiscal deficit, expected to close at 5.7 percent in 2015, as the main threat to the country’s economy over the medium-term.
The central bank also said that it had eliminated restrictions that limit the fluctuation of the national currency, the colon, scrapping them in favor of a free float, but with safeguards so the central bank can intervene in the face of sharp movements.
“We don’t expect there to be any sharp change in the market, but if there were, the bank is determined to act decidedly,” local press cited bank President Olivier Castro as saying on Sunday. He added that the decision had been taken after months of exchange rate stability.
However, in order to be able to act if necessary, the central bank also said it had decided to bulk up its foreign reserves of $7.3 billion, with a plan to buy $800 million over the next 24 months. (Reporting by Kike Pretel; Editing by Alan Crosby)