Costa Rica Central Bank Forced to Buy Dollars

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.

Friday, December 17, 2010

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.

Yesterday the Central Bank of Costa Rica (BCCR) reported the purchase of $ 7.5 million in defense of the lower limit of exchange rate fluctuations.

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."

More on this topic

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