Local Currency Shortage Pushes Interest Rates Up

In Costa Rica, the government's strong need for financing and the Central Bank's exchange rate interventions have been putting pressure on the local financial market, pushing up passive rates in Colones.

Friday, March 15, 2019

The decrease in liquidity in Colones generated by the pressure exerted by the government and the Central Bank in the local market is the main reason behind the upward trend in passive rates in local currency.

Between the beginning of December 2018 and the middle of March this year, the Basic Passive Rate (PBS), which is an average of the collection rates in Colones of financial institutions with terms of 150 to 210 days, has reported a 0.35% increase, going from 5.85% to 6.20%.

See "Basic Passive Rate Increases to 6.25%"

According to executives of the Costa Rican financial sector, the interventions of the Central Bank in the exchange market, through the sale of dollars and the withdrawal of Colones, is causing upward pressure on passive rates in local currency.

For Hernán Varela, manager of Portfolio Management at Banco Lafise, "... Private entities that are offering credit in colones, have to compete in the colones capture market, which is less liquid than dollars, so rates tend to be higher. In addition to this, the Central (Bank) has interfered in the market by selling dollars and withdrawing circulating colones, this has undoubtedly squeezed the market."

Also see "More Efforts to Curb Depreciation" and "More Efforts to Curb Depreciation".

On the other hand, Adrián Álvarez, assistant manager of Coopenae, explained to Nacion.com that "... several factors keep the passive rates, in colones, increasing. First, they have observed investors migrating to a longer-term horizon. That, coupled with the need for resources from the Central Government, which given its risk offer very attractive returns for investors, has pushed the increase."

Rossy Duran, Finance Manager of the Bank of Costa Rica, said that "... one of the main reasons in the movement of the basic rate is because of increased requirements to capture the different intermediaries of the financial system, and particularly because of a recent trend of the transfer of wealth to investments in dollars."

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More on this topic

Effective Rate in Dollars Increases to 2.54%

August 2019

In Costa Rica, the Effective Rate in Dollars increased from 2.43% to 2.54%, while the Basic Passive Rate remained unchanged.

The Central Bank of Costa Rica published on Wednesday afternoon August 14 that after the decrease of two weeks ago, the Basic Passive Rate did not change and will remain at 5.80% until next August 21.

Interest Rates Increase in Costa Rica

January 2019

The Basic Passive Rate increased from 6% to 6.05%, while the Effective Rate in Dollars went up from 2.52% to 2.57%.

The Central Bank of Costa Rica published on January 9 that after not registering variations last week, the Basic Passive Rate increased 0.05%, and the level at which it will remain until next Wednesday, January 16 is 6.05%.

Pressure on Interest Rates

November 2018

Because of the adjustments made by the Central Bank to interest rates in recent days, financial institutions in Costa Rica will be forced to raise interest rates on savings in local currency.

Arguing that forecasts suggest that inflation in 2019 could be above the upper limit of the target range, on November 1st the Central Bank of Costa Rica (BCCR) decided to raise the monetary policy rate from 5% to 5.25%.

Costa Rica: Effective Rate in Dollars Increased Up to 2.40%

October 2018

The Effective Rate in Dollars increased from 2.32% to 2.40%, while the Basic Passive Rate decreased from 5.9% to 5.8%.

The Central Bank of Costa Rica published on Wednesday afternoon, October 3rd that after the increase of 0.15% of the previous week, the Basic Passive Rate reported a reduction of 0.10% and will remain at 5.80% until next Wednesday, October 10th.

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