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Costa Rican central bank raises rates, launches measures to tame currency flux

Banco Central de Costa Rica's board raised its benchmark interest rate by 50 basis points to 4.5% on June 7 and implemented measures to avert exchange rate fluctuations, including a daily dollar auction, the regulator said in a news release.

This is the central bank's fifth consecutive interest rate hikes this year in an effort to meet inflation targets.

The regulator noted an increasing amount of the country's savings is being denominated in foreign currency, which is one of its main inflationary concerns that contributed to its most recent rate hikes in May.

To help alleviate exchange rate pressures, the central bank also launched a new set of measures June 7 that seek to normalize the Costa Rican colon's value and help meet its reported 3% to 4% inflation target range.

"The evolution of foreign exchange expectations raises the probability that inflationary expectations could exceed their target range for the upcoming months," the bank noted in a statement, adding that as of May the interannual inflation rate was at 1.7%, below the annual target.

The central bank is launching a daily dollar auction July 12 that will be referred to as Monex-Subasta. The central bank and registered exchange intermediaries will be able to participate in the auction.

"The goal is to run more negotiations through these auctions and less on Monex," El Financiero reported the central bank as saying.

The regulator also modified its method for calculating the country's reference exchange rate for U.S. dollars, which will now be calculated using the weighted average of exchange transactions between intermediaries and retail agents that took place during the prior business day during a six-hour window.

In addition, the regulator is reactivating its money market transactions platform known as Central Directo. The revamped platform, which was previously shut down after failing to meet its objective, will allow individuals and companies to invest local currency starting with a minimum of 100,000 colones at "attractive interest rates" to compete with standard deposit rates, the report noted.

In order to boost reserves, the central bank said it is requesting credit from the Latin American Reserve Fund. The authority plans to add $1 billion in reserves and "regain an adequate level," the central bank's head, Olivier Castro, said in the report.

Following the benchmark rate hike, the central bank June 7 also set the gross interest rate on overnight deposits, or the DON rate, at 2.85% annually from 2.28%.

As of June 7, US$1 was equivalent to 569.11 Costa Rican colones.