The BCCR´s intervention on the foreign exchange market increased liquidity in Colones, which in principle, and given current conditions of the monetary system, it did not have the usual inflationary effect.
The analysis on the subject made by ALDESA reads:
Today was the second day in which the exchange rate quoted on the lower band of ¢ 500 per dollar in the market.
This operation has the same effect of purchasing foreign currency with the intention of strengthening the international reserves, which also increases liquidity in Colones in the financial system.
Under other circumstances, the increased liquidity would be an inflationary effect. However, at this juncture the increased liquidity in Colones is welcomed for two reasons. First, because during the monetary aggregates the Colon did not grow at the rate of nominal growth of domestic production, creating a relative shortage of Colones making it difficult to adjust interest rates downward, and second, the high interest rates in local currency is an additional element for valuating the Colon.
Another reason for liquidity not to increase inflation is because the Colones which are being injected into the financial system have a demand of the same magnitude, which makes the increase in liquidity actually a good thing."
The Central Bank of Costa Rica has officially eliminated the exchange rate band which has been in place since 2006, and let the exchange rate float, reserving the right to "participate in the market to prevent violent fluctuations".
From a statement issued by the Central Bank of Costa Rica (BCCR):
In its Inflation Report for May 2010, the Central Bank of Costa Rica announced the gradual shift from the existing current currency bands system to a flotation regime.
The report remarks that “one of the preconditions to move towards an inflationary targets system is the existence of a flexible way to determine the exchange rate, allowing the bank to focus its monetary policy on reaching said inflation targets, without worrying for exchange rate pressures”.
A proliferation of articles, reviews and editorials on the exchange rate is the best example of the prevailing concern in a market waiting for a clear definition of the exchange rate policy by the Central Bank.
In recent weeks, and while the President of the Central Bank of Costa Rica (BCCR) is denying it , warnings have been given over interventions in the foreign exchange market by the monetary authority.
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