Exchange rate

Beginning today (October 17, 2006) there is a new exchange rate system in Costa Rica, as the Banco Central de Costa Rica (BCCR) – Central Bank – announced last Friday evening that individual banks would be allowed to set their own exchange rate within a range of low and high, known in Spanish as “banda cambaririas”.

The opening floor of the exchange rate of the Colon to the U.S. dollar was set by the Central Bank this morning at ¢514.78 and the celieng at ¢530.22. Individual banks – both state and private – and financial institutions can offer an exchange rate between the floor and ceiling, which will be posted on the Central Bank’s website for consumers to compare.

The Central Bank, in an attempt to avoid confusion has also established a “reference rate” that can be used as a guide for currency exchange transactions, like paying a dollar rent in colones or vice versa.

The “reference rate” is the same as the closing exchange rate on Friday: buy is at ¢521.12 and sell at ¢523.39.

The Central Bank is not setting the exchange rate, allowing financial institutions to set their own rate within the range. Each financial institution will be required to report their rates to the Central Bank within 10 minutes of any changes.

The move is to reduce inflation because Central Bank is in deep debt caused by its policy of shoring up the colon against the dollar. The bank has spend millions of dollars per year on the mini-devaluations over the last tow decades since the policy was instituted.

Costa Rica president Oscar Arias said on Saturday that he is pleased with the decision of the Central Bank’s board of directors to finally implement the free market exchange rate, adding that the move is will help the economic situation in Costa Rica as inflation is lowered and less dependency on dollarization.

What the change means in real terms is that before making an exchange currency one has to consult the Central Bank’s website to compare the rates offered by the various institutions.

The Central Bank will monitor the exchange rate situation and says it will adjust the high and low limits depending on the marker conditions, allowing individual financial institutions to adjust their rates up and down as the market conditions change.

The rate, according to the experts, will be determined by the amount of dollars in the market place.

For example, if there are too many dollars available and there is no demand, the financial institutions will keep the exchange rate close to the low end of the range, as they will be forced to sell back to the Central Bank at the low end. However, if there is a high demand for dollars and little supply of the currency, the rate will be on the high end and will increase with the market conditions.

The colon could easily reach a high of ¢600 by the years end, much higher that if the Central Bank were continuing with its mini-devaluation policies.

The Central Bank says that the change is temporary, that is it could be changed at any time. However, it is important to note that the last monetary policy lasted 22 years.

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