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.
Last Friday the average exchange rate settled at ¢573.87, ¢10.98 under the upper band for the day.
For the second week in a row the Central Bank of Costa Rica did not intervene in the exchange market because the exchange rate fell below the upper band.
The payment of taxes could have caused a slight lowering of the exchange rate because it must be paid in colones.
The finances of the Central Government of Costa Rica continued to show a marked deterioration. Up to and including April, the financial deficit stood at $222 million.
In the first quarter of this year, the results of the accounts of the Central Government showed a decline of 8.5% in revenue over the same period in 2008. Revenue from income taxes showed an inter-annual decrease of 9.8% and customs showed a contraction of 21.4%.
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.
A greater demand for dollars will be one the main triggers in the new exchange rate environment.
The adjustment to the width of the exchange rate bands carried out by the Central Bank on the 16th of July, along with the lack of volatility in the exchange rate, has created a feeling in the market that the US dollar will remain fixed to the upper margin throughout the rest of 2008.
A survey of economic forecasts shows that the average inflation rate expected for Costa Rica over the next 12 months is 11.7 per cent. A currency devaluation of 3.5 percent is also expected.
The survey is carried out each month by the Central Bank to measure inflation and exchange rate expectations by analysts and experts. The survey covers businessmen, academics and consultants.
As pressure build up on Costa Rica's money markets, the only way seems to be up for the US dollar.
The nation's current account balance is showing a large deficit, and flows of investment – both financial and direct – are down. "There's a combination of factors behind the rise in the dollar's exchange rate," said Andrés Víquez, manager of the Aldesa brokerage.
A new increase in interest rates has put Costa Rica's banks on a contingency footing.
Two banks – Nacional and de Costa Rica – have cut back on credits, while others are on standby for a possible change in strategy.
Several economists say that the impact of dearer money could be considerable, leading to a growth in bad debts. But banks remain optimistic; existing portfolios are unlikely to be affected, they say.
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.
Costa Rica's central bank is behind the sudden increase in the dollar's value in the nation's wholesale money market, William Hayden, general manager of Banco Nacional de Costa Rica, claimed.
The reason for the sudden rise in the dollar had been a mystery for many. But Hayden claimed it was caused by wholesale market buying surges in which central bank operators acquire dollars every 15 minutes for supplies to state entities.
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.