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Central Bank Continues Tightening Monetary Policy

September 17, 2004

THE Central Bank has raised thebasic debit and attraction-of-funds 30-dayinterest rates by a quarter of a percentagepoint to 14.25% and 13.5%, respectively,the daily La Nación reported.The basic rate is an average of theinterest rates offered by banks, non-bankingfinancial institutions, the Central Bankand the government on six-month depositsand investments. The basic rate is theeconomy’s benchmark interest rate.The increase in the attraction-of-fundsrate – the interest rate the bank pays onbonds it issues to control the financialmarket’s liquidity and conduct its monetarypolicy – was the second one in thepast month and a half.On July 26, the Central Bank increasedthe attraction-of-funds rate by half a percentagepoint from 12.75% to 13.25% aspart of a series of measures aimed at curbingrising inflation (TT, July 30).Those measures also included anincrease in the colón’s daily devaluationrate against the dollar and a gradualincrease of commercial banks’ reserveratio or encaje – the percentage of abank’s assets that must be turned over tothe Central Bank to ensure the bank’s stability– from 10% to 12%.On Sept. 1 the Central Bank hadincreased the reserve rate to 11%. Theincrease to 12% will take effect Oct. 1.The reserve rate has more than doubledso far this year. It started the year at5%, but was increased to 6.5% on Jan. 16.On Feb. 16 it increased to 8% and onMarch 16 to 10%.Central Bank president Francisco dePaula Gutiérrez’s decision to use thereserve rate as a monetary policy tool representsa shift compared to the policiesused of his predecessor Eduardo Lizano,who has said he considers the rate to be atax on banking and tried to keep thereserve rate at 5%.

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