Tuesday 7 February 2023

Central Bank announces policy measures aimed at the foreign exchange

Since the end of 2021, it has been authorized to offer debt instruments in foreign currency, in order to expand financial savings options in the country.

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7 February 2023 - At The Banks - BCCR

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QCOSTARICA – Since February 2015, the Banco Central de Costa Rica (BCCR) – Central Bank of Costa Rica – has adopted a managed floating exchange rate scheme, in which the exchange rate is determined by market forces; however, the BCCR intervenes in the market to manage its requirements and those of the non-banking public sector (SPNB) and also, if required, to avoid abrupt movements in that macro price, without modifying its trend, be it upward or down.

Since the end of 2021, the Central Bank has been authorized to offer debt instruments in foreign currency, in order to expand financial savings options in the country.

As the Central Bank pointed out on May 23 in a press release, since the beginning of the COVID-19 pandemic, the world and our country have faced various shocks: the measures to contain the virus negatively impacted many economic activities, including tourism, which in the case of Costa Rica has not yet recovered pre-pandemic levels.

Subsequently, the world economic recovery was accompanied by increases in the price of raw materials (for example, oil) and higher international inflation. This behavior was exacerbated by problems in global supply chains (increased transportation costs) and, more recently, by the war between Russia and Ukraine.

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Added to this was the internal effect of the recomposition of the financial investment portfolios of the pension funds in favor of foreign assets, a situation that was evident in an increase in the demand for foreign currency.

In this context, the Central Bank applied its foreign exchange policy with a level of international reserves that it still considers adequate and that has allowed it to meet the requirements of the SPNB and, more recently, to face abrupt movements in the price of the currency.

The Central Bank recognizes that these actions have reduced the country’s financial armor, which is why it deems it appropriate to announce measures that have already been discussed by its Board of Directors or that are in the process of being discussed, and that seek, preventively, to improve that financial shield.

Of these measures, the following stand out:

  1. Since the end of 2021, it has been authorized to offer debt instruments in foreign currency, in order to expand financial savings options in the country. In 2021, it began with the reception of short-term deposits and, more recently, 3- and 5-year issuances were authorized.
  2. The Board of Directors authorized the initiation of procedures to request a loan with the Latin American Reserve Fund for US$ 1 billion.
  3. In an attempt to improve the process of price formation in the Foreign Currency Market (Monex), the hours of this market are modified, so that as of June 6, it operates from 12 noon to 1 in the afternoon.
  4. For its part, in the monetary field, the Central Bank announced that it will continue its active liquidity management policy in the different trading markets in which it operates. As a complement to this, it is valued to increase the percentage of minimum legal reserve for operations in national currency, a decision that, if proceeding, will be announced in advance.

With these measures, the Central Bank is precautionarily seeking to reinforce the country’s financial armor. This will facilitate the attention of the external and internal shocks that the national economy faces and its intervention in the foreign exchange market when the technical analysis so requires.

Source: Revista Summa; BCCR

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