Costa Rica: Central Bank paves the way for inflation targeting
June 3, 2011
The persistent appreciation of the Colon in previous months prompted the Central Bank to launch an aggressive program of foreign currency purchases in order to prevent the exchange rate from falling below the lower trading band. Against this backdrop, the IMF recently recommended the Central Bank to move away from a system of crawling bands to a more flexible exchange rate regime. The Bank agreed with the IMF, but added that the current circumstances are not favourable to abandon the current system. On 2 June, the Central Bank redefined the Monetary Policy Rate (TPM) as the reference to conduct very short-term interest rates (one day), paving the way for an inflation targeting regime. In an official communique released on 3 June, the Central Bank declared its intention to move towards an inflation targeting policy in order to achieve a low and stable inflation in the medium term. In addition, the Central Bank lowered the monetary policy rate from 6.50% to 5.00%, with the inclusion of a 100 bps corridor for one day liquidity transactions.