Oil Prices Could Derail Country’s Monetary Policy

March 12, 2004

HIGH international oil prices could make it difficult for the Central Bank to meet the macroeconomic targets it set in its 2004 monetary policy, according to General Manager José Rafael Brenes.

Brenes said the current price of crude oil is 25% higher than expected when this year’s monetary policy was announced, the daily La Nación reported.

On Jan. 14, the Central Bank unveiled its annual monetary policy, which predicted economic stability with 4.4% growth and 9% inflation (TT, Jan. 16). The bank’s calculations were based on the assumption that the average price of a barrel of oil in 2004 would be $28.

However, in recent weeks it has hovered between $32 and $35.

Central Bank President Francisco de Paula Gutiérrez said the bank would wait to see how the price of crude evolves before revising its goals.

If the high prices continue, it would likely result in higher inflation, Brenes said. During the last five months, the country has registered a monthly inflation higher than 1%.

Experts worry that in addition to higher inflation, high oil prices could increase the country’s current account deficit – the overall balance between imports of goods and services (not capital).

This year, the Central Bank was expecting the country’s current account deficit to be equal to 4.4% of the country’s gross domestic product (GDP).

However, higher oil prices will increase the price of total imports and the total size of the deficit. For example, Brenes said, if oil prices remain $5 above the Central Bank’s estimate, the deficit would increase by approximately $80 million.

To counter the deficit and prevent the Central Bank from depleting its foreign currency reserves, it would be necessary to increase the colón’s rate of devaluation against the dollar or sell bonds on the open market, according to Brenes.

 

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