Colón-Dollar Rate Pressure Eases

Peter Krupa March 7, 2008

A slowdown in dollar acquisitions by the Central Bank indicates the downward pressure on the colón-dollar exchange rate may be letting up.

The bank absorbed only $3.5 million during the last week of February, down drastically from the $176.7 million it bought up during the last week of January. Though data for the first week in March were not available by press time, daily dollar trades on the exchange market continued to be light.

Late last year, downward pressure on the exchange rate caused by a flood of dollars into the market had driven the Central Bank to move its lower exchange limit and allow the colón to gain 4% on the dollar overnight.

“We believe the (exchange) market could now be finding its equilibrium price,” said Isaac Castro, chief economist at finance company Interbolsa.

But while the new numbers are a sign that the Central Bank’s short-term colón interest rate cut may have worked to discourage foreign speculation that pushed on the value of the colón, the rate cut hasn’t done much to further the bank’s greater goal of lowering inflation.

Monthly inflation for February came in at 1.11%, the third-highest monthly inflation in at least 14 months, and put inflation for the latest 12-month period at an uncomfortable 11.4%.

The Central Bank’s goal for 2008 is to lower inflation to 8%, plus or minus 1 point.

Inflation for 2007 was 10.81%.

Much of the current inflationary pressure comes from the steady increase of international food and energy prices, but the historically low colón interest rates have also encouraged spending.

Castro called the current interplay among inflation, the exchange rate and interest rates an “ambiguous situation” that is causing uncertainty among investors.

He said Interbolsa would like to see the Central Bank pick up the pace toward a completely floating exchange rate, which was the bank’s stated goal when it switched to a system of artificially imposing an upper and lower exchange limit through market intervention.