Central bank moves to anticipate higher inflation

The Banco Central acted Wednesday to make money a bit more expensive.

The board of directors of the Banco Central increased the rate at which commercial banks can borrow money to 4.75 percent. That is a 1 percent increase.

In a statement the central bank said that looser money policies would increase inflation higher than had been anticipated through 2015. Bank experts estimated the inflation to be up to 5 per cent.

The recent spike in the value of the U.S. dollar has sent these economic experts back to the drawing board as the country braces for higher prices in nearly everything.

The bank rate, called the tasa de política monetaria, is similar to the fed funds rate in the United States. It is the interest rate at which the central banks loan money overnight to balance out the books of the commercial banks. In Costa Rica, that rate has been as high as 15 percent.

More recently the Banco Central cut the rate to 3.75 from 4 percent. That was seen as a move to stimulate the economy. The slightly higher bank rate is expected to filter through the economy and make borrowing a bit more expensive.

The central bank intervened in the Monex money market again Wednesday. It said that the pressure lessened and that the value of the dollar dropped 3.58 colons compared to the value Tuesday.

Still the central bank set the exchange rates at record highs. A dollar could purchase 557.62
colons and 572.44 colons were needed to purchase a dollar. The value of the U.S. dollar has increased about 13.2 percent since the first of the year.

Initially this is great news for expats, who still are paying existing prices for gasoline, electricity and imported items. But these are bound to increase and force the central bank to refigure the inflation rate.

Even locally grown products like potatoes are vulnerable to the higher dollar because farmers must purchase motor fuel and even imported chemicals.

Tourists are benefiting to some extent because prices have not yet caught up with the exchange rate. However, many tourism sales, such as hotels and tours as well as plane fares, are denominated in dollars.

Those who are suffering the most are Costa Ricans who earn colons and have dollar mortgages or must make other payments in dollars. They have taken a major hit.

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