Since last week there has been downward pressure on Costa Rica's currency, the colon, and this has been reflected in an increase in the price of the dollar.
Between last Thursday and yesterday the price of the colon fell from 522.50 per dollar to 535.25, a decline of 12.75 colons.
Last week the currency traded as high as 516 per dollar, but yesterday it closed at 529.25.
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.
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.
A period of low interest rates in Costa Rican colons appears to be coming to an end as analysts foresee increases in the coming months.
Some banks are already using higher lending rates to slow down the growth in credit. "Higher rates will give the central bank its most effective weapon in controlling inflation," said Fernando Estrada, a trader with Mercados Internacionales.
For Francisco de Paula Gutiérrez, President of the Central Bank of Costa Rica, the pressures that have been holding the price of the dollar down will soon begin to let up.
Larger purchases by Recope, lower speculative capital flows and a smaller increase in exports are the elements which, in the opinion of the bank, could offset the downward pressur and make the exchange rate start to rise.
The Costa Rican colón may have appreciated in value, but the nation's exports remain competitive, says the IMF.
A Fund report indicates that the colón's exchange rate is close to its real level, as measured by export performance.
Terms of trade remain favorable and are expected to remain consistent with the advance of the economy, according to the report.