Capitalization of Costa Rica's Central Bank would cause distortions

The Law of Capitalization of the Central Bank is being scrutinized by bankers and analysts, many of whom question the benefits attributed to it as an inflation-fighting mechanism.

Tuesday, April 22, 2008

From the Central Bank's point of view there is evidence that inflation is caused by three main structural factors: Central Bank losses, the exchange system, and distortions that impede the control of liquidity in Costa Rica.
It believes an additional factor is the failure to enforce legal minimum reserves requirement at the Banco Popular y de Desarrollo Comunal, which tends to limit the effectiveness of monetary policy in reining in inflation.
Experts say the proposed law, which would raise minimum bank reserves, would be robbing Peter to pay Paul. It's believed that there would be some lowering of inflation through a reduction in the money supply, but this would be offset by higher interest rates and higher spreads between bank interest paid and interest charged to borrowers.

More on this topic

Central Bank: Big Brother

April 2010

As in Orwell’s fable, Central Banks assume the task of deciding who, among equals, “is more equal than others”.

Paul Laurent Solís analyzed the anathema that has become the label “tax haven”, and remarked the role Central Banks have assumed in Central American economies, especially when they become tools for whichever government that happens to be in power.

Costa Rica: High reserve requirements would raise credit costs

April 2008

Raising the minimum legal reserve requirements for commercial banks and financiers could translate into an increase in interest rates for customers.

The increase in reserve requirements is being considered in an effort to capitalize the Central Bank and give it more power to control inflation. The Executive Branch has sent a bill that would have this effect to the Legislative Assembly.

Costa Rican Central Bank seeks new powers

April 2008

Costa Rican legislators are calling on the administration of Oscar Arias to grant the Central Bank more regulatory powers.

Commercial banks remain wary of some of the proposed measures, such as one that would impose the minimum reserve requirement on Banco Popular.
Banco Popular opposes the restriction because of what it describes as the social content of much of its lending.

Costa Rican Central Bank pares deficit

April 2008

The Costa Rican Central Bank has been lowering its deficit since July of last year.

From the end of 2005 until last July, the gap between the gap between the bank's income and its outlays stood at about 132 billion colons (US$650 million).
Since then, however, the gap has closed steadily, falling to 85 billion colons this February. Economists say the deficit is one of the main underlying causes of Costa Rican inflation.

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