Central Bank Tightens Policy

“IF we have to choose between stability and growth,we choose stability,” said Central Bank PresidentFrancisco de Paula Gutiérrez on Monday after announcingthe bank will tighten the country’s monetary policyto curb rising inflation and ensure continued economicstability.“[A tighter monetary policy] means interest rateswill rise. If you have taken out loans, they will be moreexpensive to pay back,” Gutiérrez explained onTuesday. “In general, the price of money will go up.These policies will make credit more expensive. It willalso make imported goods more expensive. It will makepeople consume less and save more.”Gutiérrez described the proposed measures as “preventive”and “necessary,” given the current economicclimate.Gutiérrez also announced the Central Bank’s revisedprojections for economic growth and inflation for thisyear. The economy is expected to grow 3.9%, while consumer prices will have risen by 11% —their highest level in six years.The original monetary policy for thisyear announced in January projected 4.4%growth and 9% inflation (TT, Jan. 16).WHILE growth is lower than originallyexpected, mainly due to lower than expectedhigh-tech exports, inflation is what worriesCentral Bank officials. Consumer priceshave been growing faster than expectedsince the end of last year as a result of sharpincreases in the international prices of oil,wheat, rice, cooking oil and steel, and ratehikes for most public utilities.The bank’s original monetary policy wasplanned thinking the average price of a barrelof oil this year would hover around the$28 mark. However, the actual price duringthe first six months was closer to $40 a barrel.On Wednesday, the price of a barrelreached $42.90 — its highest level this year.This increased the country’s oil tab by$190 million during that period. Thebank’s revised projections call for the priceof oil to remain stable at $40.Between January and June, the consumerprice index – a measure of the averagechange over time in the prices paid byconsumers for a basket of basic consumergoods and services – rose by 6.26%.However, it was the underlying inflationindex – a more technical inflationmeasure used to evaluate inflationarytrends that excludes volatile productsprone to sudden increases and sharp drops— which rose by 5.8% during that period,that prompted the Central Bank to tightenmonetary policy.WHILE a tighter monetary policy willlikely reduce inflation, it will also reducethe country’s economic growth potential.The Central Bank is willing to pay theprice of lower growth in exchange forlower inflation and economic stability,Gutiérrez said.The bank’s policies are expected tosucceed in lowering inflation to less than10% next year. However, they are alsoexpected to cause growth to begin to slowdown near the end of this year. This trendwill continue during 2005.The Central Bank expects the economyto grow by 2.9% next year. The projectedgrowth rate would be consistent with CostaRica’s average growth rates during most ofthe last decade, but significantly lowerthan last year’s growth rate (5.6%) and thisyear’s projected growth rate (3.9%).The tightened monetary policy is alsoexpected to slow the rate at which privatecredit is issued. This will further limit economicgrowth.Gutiérrez said the monetary policy isnot “written in stone” and will be revised ifthe current economic situation changes orif the much-delayed tax plan being studiedby the Legislative Assembly is approved.The Central Bank will closely monitorthe national and international economicsituation in order to “adjust the dosages ofthe medicine” it is administering to theeconomy, Gutierréz said.THE Central Bank announced fourmeasures aimed at tightening monetarypolicy and curbing inflation.Starting this week, the colón’s devaluationrate against the U.S. dollar willincrease to ¢0.17 a day, up from ¢0.15 aday. Last year, the colón’s devaluation ratewas ¢0.16 a day.The Central Bank also raised the interestrate on 30-day investments in colonesby half a percentage point, from 12.75% to13.25%.Further interest rate hikes are likely.The Central Bank will keep a close eye onU.S. interest rates, which are expected tocontinue to rise during the remainder of theyear, Gutiérrez said.In the coming months, the bank plansto continue to sell bonds with the intent ofreducing excess liquidity — cash and otherassets that can be quickly converted intocash, such as savings in bank accounts —from the economy.Liquidity increased significantlybetween April and June as thousands ofinvestors took their money out of the country’sdollar and colón investment funds andbegan depositing it in banks (TT, May 14).The Central Bank also announcedplans to increase commercial banks’reserve ratio — the percentage of a bank’sassets kept by the Central Bank to ensurethe bank’s stability — from 10% to 12%.This will be done through two increases of1%, one on Sept. 1 and the other on Oct. 1.GUTIERREZ compared the measuresto steering a plane through dark clouds.“It’s like if you’re piloting an airplaneand you see dark clouds up ahead,”Gutiérrez explained. “One possibility is tobelieve the wind will blow away the cloudsand do nothing. The other possibility is tomake a change in course, avoid the cloudsand keep going without problems.“That’s what we’re doing. If theclouds disappear, we can return to theoriginal course. We’re telling people tofasten their seatbelts.”