The discretionality of interventions made by the central bank in the foreign exchange market could open the gate for unjust enrichment of those who have inside information.
EDITORIAL
In the best of democratic worlds, the intervention of public employees in the economy generates income transfers between the sectors within the economy, according to state policies that are largely accepted by the population.
After the strong rebound experienced on Wednesday 29, the dollar has stabilized in the exchange market.
From a statement by the Central Bank of Costa Rica:
Today, January 30, 2014, the exchange rate of the U.S. dollar in the Foreign Currency Market (Monex) opened with quotes of ¢519 and has shown a downward trend. At 2:00 pm today the average price was ¢514.64 per dollar with a negotiated amount of $4.5 million, which corresponds to a relatively normal amount for the advance of the session.
The Central Bank of Honduras has reinstated upper and lower limits for foreign exchange auctions, which will be held Monday through Friday.
A statement by Central Bank of Honduras reads:
Faced with a favorable external position BCH has decided to reactivate the exchange rate band.
Increased external demand coupled with better prices of main export products and a greater flow of remittances, have allowed an important accumulation of BCH’s reserve assets, reaching a balance of international reserves in excess of U.S. $3000.0 million, which will finance about four months worth of imports and cover more than one hundred percent of the external public debt.
The Central Bank of Costa Rica (BCCR) reported the acquisition of $ 7.5 million to defend the lower limit of the band system governing the exchange rate.
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.
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”.
The recent increase in the value of the Costa Rican colon versus the dollar is worrisome, not only because there are no clear reasons to explain it, but also because it would be hard to contain it without causing greater problems.
In the past weeks, and without apparent reason, the price of the U.S. dollar in Costa Rica dropped considerably.
Last week we surveyed some financial operators as to why these movements where occurring, the general answer being: “we don’t know”.
The exchange rate showed a strong rise in the MONEX wholesale market, once again colliding with the upper intervention limit.
An ALDESA report indicates that on July the 3rd, the average exchange rate was ¢577.93, and the following Monday it was ¢581.97, but, at the end of the trading session, a maximum of ¢586.05 was achieved. This is the value set for the upper intervention limit, suggesting the Central Bank of Costa Rica had to sell dollars again.
After in the increase in the growth rate of the ceiling of the exchange band, the reference exchange rate continues to be close to the ceiling.
Nacion.com reports: "The weighted average price (considering the amount traded at each exchange rate) of the wholesale market (Monex) at the end of the day was at 562.28 colones per dollar, very close to the ceiling of the band, which was at ¢563,65 yesterday."
The fourth consecutive week, the Central Bank intervened in the exchange market selling foreign exchange to prevent the exchange rate from going above the preestablished ceiling.
Since the last modification to the exchange rate bands regime, the monetary authorities have been forced to intervene in the wholesale money market (Monex) in order to prevent the exchange rate from surpassing the upper limit set by the bank.
The Costa Rican central bank, the BCCR, modified its exchange-rate policy in an effort to control a surge in the value of the US dollar on local money markets.
Under the country's currency-band system, the upper band (the maximum price at which the central bank sells dollars to intermediaries) has been set at 555.37 colons and will be increased daily by six céntimos.
Amid growing criticism of the currency bands used to control the value of the colon, the Costa Rican central bank defended the system.
The bands are not an end in themselves, said the bank's president, Francisco de Paula Gutiérrez. Rather, they are a stage in the transition to a floating exchange rate.
Gutiérrez said that countries that had used currency bands in the past – such as Chile, Brazil and Mexico – had been able to control inflation.
After several days of calm in Costa Rica's currency markets, the colón began to fall once again against the US dollar, which came within 10 Costa Rican cents of a record high. But the volatility was curbed by central bank intervention.
Costa Rica's banks were offering the US dollar at 528.52 colons on Thursday, up from 522.60 a day earlier. The central bank's reference exchange rate now stands at 523.80 to the dollar, within 10 cents of the 523.90 that prevailed from 14 to 17 October of last year.
Francisco de Paula Gutiérrez, president of Costa Rica's central bank, hit back at critics of the bank's monetary policy.
The system of bands that governs the exchange rate has been under fire, and the bank has been accused of fueling speculation and uncertainty by holding back information.
Gutiérrez said he would always use a maximum of clarity in applying the rules for the bank's intervention in the money markets.
Costa Rica's central bank has become involved in a dispute with the private sector whose leaders accuse the financial authorities of failing to make clear how the new exchange-rate system will work.
Business leaders were unhappy with the central bank's intervention in the wholesale dollar market, and accused the bank's governor, Francisco de Paula Gutiérrez, of offering an explanation "that explains nothing".
The recent tendency in the dollar's exchange rate against the Costa Rican colón represents a change that provides an incentive for inversions in the US currency.
History seems to be repeating itself. Many investors betted on a rise in the value of the colón when the exchange rate began to stick on the exchange-rate system's lower band. Now, with the strengthening of the dollar they are seeking to get back into dollar investments.