Costa Rica: More Inflation and Less Devaluation

©image: Agustina Cobas

A year ago, in January 2010, the expectation was a devaluation of 5.5%, with an exchange rate of ¢ 563 at the time. That would have meant that one dollar would now be worth ¢ 593.

Currently, expectations consider 3.8% devaluation according to the survey, so the rate by January 2012 should be ¢ 525.

During the week the non-banking public sector has tripled its foreign exchange transactions in the wholesale market (Monex), however, the biggest purchases have generated only a slight increase of ¢ 1.4 on the weighted average of Monex, ¢ 504.44, where the average exchange rate has remained relatively stable so far this year.

The same survey reveals an expected increase in inflation to 6.8%, which should be accompanied by devaluation in order to keep the relative price of domestic and international goods constant, assuming inflation is less than 3% for the rest of the world.

More on this topic

Costa Rica's inflation to surpass 11%

June 2008

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.

Exchange Rate Volatility

February 2010

“When markets are moving a lot, be prudent. When they remain still, be double prudent”.

In countries with domestic currencies, changes in the exchange rate are always a reason for concern. Economic and financial agents are eager to understand why such fluctuations occur, in order to hedge and if possibly benefit, from them.

From Currency Bands to Floating Currency

June 2010

In its Inflation Report for May 2010, the Central Bank of Costa Rica announced the gradual shift from the existing current currency bands system to a flotation regime.

The report remarks that “one of the preconditions to move towards an inflationary targets system is the existence of a flexible way to determine the exchange rate, allowing the bank to focus its monetary policy on reaching said inflation targets, without worrying for exchange rate pressures”.

Costa Rica Central Bank Forced to Buy Dollars

December 2010

The Central Bank of Costa Rica (BCCR) reported the acquisition of $ 7.5 million to defend the lower limit of the band system governing the exchange rate.

The BCCR´s intervention on the foreign exchange market increased liquidity in Colones, which in principle, and given current conditions of the monetary system, it did not have the usual inflationary effect.