Colon tanks, Costa Rica raises interest rates to slow inflation

For the first time in history, the Costa Rican Colon surpassed 600 colones per dollar. On Wednesday, some banks were reporting an exchange rate of ₡616 for $1.

This week’s dip was caused by uncertainty surrounding the proposed tax reform bill designed to contain Costa Rica’s growing public deficit.

The proposal passed the first debate in the Legislative Assembly and is now being debated by the Constitutional Chamber of the Supreme Court (Sala IV). The Minister of the Presidency, Rodolfo Piza, said the currency’s devaluation was a “wakeup call” that showed the need to pass tax reform.

“Several months ago, the Finance Minister (Rocío Aguilar) said that if the [tax reform bill] wasn’t passed in time, there would be strong effects on the economy,” Piza said.

The Costa Rican Colon’s value dropped 9 percent in 2018 according to the Central Bank of Costa Rica (BCCR).

On Thursday, the BCCR announced steps it was taking to slow inflation. Rodrigo Cubero, president of the BCCR, said that Costa Rica would raise interest rates. The policy rate rose 25 base points to 5.25 percent per year while the gross interest rate rose 19 base points to 3.23 percent per year.

“The Central Bank’s inflation models suggest that inflation in 2019 could surpass the upper limits of our target range,” Cubero said. The BCCR established an inflation goal of 3 percent, with a margin of plus or minus 1 percentage point.