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Dollar exchange rate down following Central Bank’s intervention announcement

May 26, 2017

The Central Bank of Costa Rica (BCCR) will intervene in the foreign exchange market in order to curb the sustained hike in the exchange rate of the dollar. This week, that price reached a historic high of ₡600 in various private banks.

The bank confirmed in a news release on Thursday that it has approved a plan to intervene in the foreign exchange market with up to $1 billion over the next days.

Róger Madrigal, director of the BCCR’s Economic Division, said the recent behavior of the exchange rate “introduced risks for both price stability and the financial system.”

Bank officials, however, ruled out doing the intervention in a single day’s market session, as “it would be too aggressive,” Madrigal said.

Quick response

The BCCR announcement caused an immediate reaction with a ₡7.36 drop in the dollar price in its MONEX exchange, the market in which banks trade currency. The sale price of the dollar at the country’s banks fell ₡4 from ₡598.49 to ₡594.47. The average purchase price closed at ₡581.71.

Thursday also was the first day in May that the dollar exchange rate recorded a decrease, following sustained hikes throughout the month, and particularly this week.

So far this year the price of the U.S. dollar has risen by more than ₡30, representing a 5.7 percent dip of the colón, according to BCCR data.

In the past two weeks alone, the bank has sold $171 million in the exchange market in an attempt to stabilize the price.

Other measures

Central Bank officials at the press conference announced that, in addition to the intervention, they also approved a one-point increase in the monetary policy rate that the bank applies to banks’ transactions.

The increase aims to reduce the pressure on the foreign exchange market in order to stimulate more savings in colones.

“Raising yields in colones seeks to discourage investors from changing their bank savings into dollar savings,” Madrigal said.

He added that they expect these measures “will be enough for the market to realign with their estimated projections for this year.”

BCCR officials attribute recent sharp variations in the exchange rates to a spike in the number of investors looking to change their bank savings from colones to dollars. Other reasons include the lack of sufficient dollar availability at banks, the increase in commodity prices and recent hikes in interest rates of loans in dollars.

The Costa Rican Banking Association (ABC) showed its support for the measures and said in a news release that “approved adjustments were necessary to protect the stability of the local economy.”

ABC economic adviser Ronulfo Jiménez said that external conditions as well the country’s high fiscal deficit are the main problems driving recent increases in the exchange rate and in interest rates.

Jiménez noted that the spike in the demand for foreign currency originated mostly in people’s — and not in banks’— transactions.

“We can positively say that banks are not exerting pressure on the exchange rate of the dollar,” he said.

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