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Central Bank Raises Inflation Estimate

August 5, 2005

THE Central Bank announced July 29that it has raised its estimated inflationrate for the year from 10% to 12.7%.Bank President Francisco de PaulaGutiérrez explained that the figure wasraised after reevaluating the economicindicators for the year. He said that higherthan expected oil prices and the risingcosts of consumer goods, especially coffeeand beef, were major factors.In addition, an unexpectedly highamount of foreign short-term investmentput more colones into the economy, causingconsumer prices to rise.The consumer price index – a measureof the average change over time in theprices paid by consumers for a basket ofbasic consumer goods and services – roseby 6.86% in the first six months of 2005,up from 6.86% over the same time periodin 2004.Gutiérrez said he expects familyincomes will not increase much this year,and that the poverty rate will rise.To combat inflation, the bank willcontinue a restrictive monetary policy,Gutiérrez announced. One tactic, heexplained, will be to raise interest ratesfor government bonds as a way to drawmore colones out of circulation.The bank will also continue with itspolicy of mini-devaluations of ¢0.15 daily.Preceding the announcement,Gutiérrez signed an agreement with theCentral American Economic IntegrationBank giving the Central Bank access toup to $150 million to reinforce itsreserves, if necessary.

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