Costa Rica enforces new methodology for calculating dollar exchange rate

The Central Bank of Costa Rica (BCCR) has enforced a new methodology to calculate the reference exchange rate of the US dollar, and it has already showed results.

The bank confirmed in a news release that during the first day of the new methodology, applied on Tuesday, the exchange rate differential — the difference between the buy and sell price — fell by ₡5.95. On Monday, the exchange rate differential closed at ₡13.02 and on Tuesday, it closed at ₡7.07.

The reference exchange rate is the weighted average of the buy and sale prices from all financial intermediaries. The BCCR calculates the rate every evening and the resulting value applies for the next day.

The change in the calculation methodology is possible since the BCCR now has online information on all exchange transactions performed each day.

The bank explained that the new methodology also increases the benchmark’s coverage by taking into account figures and prices of transactions at all banking intermediaries. The new calculation considers exchange rates effectively traded over a longer period of time, and therefore higher traded volumes.

Previously, the BCCR used as reference all daily transactions conducted between 2 – 5 p.m. Bank officials now use all transactions between 10 a.m. and 4 p.m.

Another change is that in the previous formula, the bank weighted the exchange rate based on the transactions made during the previous five days. Exchange rates now are calculated every day, according to all buys and sells traded daily.

Historic highs

The exchange rate of the Costa Rican colón against the dollar reached a historic high of ₡600 in various private banks in late May, the highest since January 2010.

The behavior forced the Central Bank to intervene in the foreign exchange market in order to curb the sustained hike in the exchange rate of the dollar.

BCCR officials at the time said the behavior of the exchange rate “introduced risks for both price stability and the financial system.” The bank then approved a plan to intervene in the foreign exchange market with up to $1 billion over the following days.

In addition, bank officials also approved a one-point increase in the monetary policy rate that the bank applies to bank transactions. The increase aimed to reduce the pressure on the foreign exchange market in order to stimulate more savings in colones.