From real depreciation to appreciation and subsequent rebalancing
The Real Effective Exchange Rate (REER) index measures the value of the domestic currency against a basket of trading partner currencies, adjusted for relative inflation differentials. It provides a broad assessment of external competitiveness by capturing both nominal exchange rate movements and domestic price dynamics.
An increase in the index indicates a real appreciation, reducing external competitiveness, while a decline reflects a real depreciation, improving the relative price of domestic goods in international markets.
Recent dynamics
The index declined throughout most of 2023, moving from elevated levels at the beginning of the year to significantly lower levels by year-end, indicating a sustained real depreciation. This trend continued into early 2024, with the index reaching its lowest levels in the sample.
From mid-2024 onwards, however, the trajectory reversed sharply, with a strong and sustained appreciation that extended into late 2024, culminating in a peak at the end of the year. In 2025, the index entered a gradual downward adjustment, with a moderate depreciation trend throughout most of the year.
By early 2026, the index remained below its late-2024 peak but still above the lows observed in early 2024, suggesting a partial correction following the earlier appreciation.
Interpretation and economic signal
The evolution of the REER reflects alternating phases of competitiveness gains and losses driven by the interaction of exchange rate movements and relative price dynamics. The depreciation observed in 2023 and early 2024 likely supported external competitiveness and tradable sector activity, while the subsequent appreciation in late 2024 suggests a tightening of external price conditions, potentially reflecting stronger capital inflows or shifts in domestic financial conditions.
The correction in 2025 indicates a partial rebalancing, restoring some degree of competitiveness. From a structural perspective, fluctuations in the REER influence the allocation of resources between tradable and non-tradable sectors, as relative price signals guide investment and production decisions.
Periods of sustained appreciation may redirect resources toward domestic-oriented activities, while depreciation tends to favor export-oriented sectors, with implications for the composition and sustainability of growth over time.
Conclusion
The recent trajectory of the Real Effective Exchange Rate highlights a cycle of depreciation, sharp appreciation, and subsequent partial correction. While the current level suggests a more balanced position relative to recent extremes, the volatility observed over the period underscores the sensitivity of external competitiveness to both financial conditions and price dynamics.
Maintaining a stable and aligned real exchange rate remains central to supporting a balanced allocation of resources and preserving external sustainability over the medium term.