Uruguay’s Central Bank leaves reference interest rate unchanged at 4.5%

RIO DE JANEIRO, BRAZIL – The Uruguayan Central Bank is waiting for stronger signals of economic recovery before altering its current monetary policy, according to a release from the Monetary Policy Committee, Copom.

In its third 2021 meeting, at the end of June, it ratified the current benchmark interest rate of 4,5% per annum and anticipated it will wait for improved indicators from the pandemic battered economy.

Monetary policy will remain expansive, with low interest rates to help companies and consumers and avoid liquidity restrictions. Copom points out that “indicators of the real economy” are expected to take some more time in showing “a recovery tendency”, in the positive context of an improving sanitary situation.

Once more reactivation signals surface, the bank will start a cycle of increasing the monetary policy rate, but once it begins “the rate increase will be gradual to internalize the impact of inflationary expectations.”

Further on, the Copom release points out that although the sanitary crisis is still a source of uncertainty, both the region and the rest of the world face a scenario in which growth prospects are improving. The economic situation globally, mainly in the leading economies, has “turned out to be more robust”, while in the region there are signs of recovery.

Copom adds that after the drop in Uruguayan economy activity during the first quarter of 2021 recovery signs have emerged, but are considered insufficient to begin a cycle of rate increases.

To that respect Copom mentions that some indicators such as inflation in the twelve months to June, “reached 7.33%, above the target goal” set out by monetary authorities (3% to 7%) and 3% to 6%, beginning September 2022.

However hardcore inflation – which excludes items with the most volatile prices – reached 8%. “This was due mainly to the increase in fuel prices and leisure, but partly compensated with an abundance of fruits and vegetables.”

In the long term, inflation expectations show a descending tendency. ”The horizon for monetary policy (24 months) has shown a persistent decrease and hopefully it will not be significantly impacted by changes in relative prices such as those registered with fuel.”

Finally, inflation expectations are closely linked to the consistency of macroeconomic policies and compliance with the fiscal targets outlined in the budget as well as the adjustment of government utility rates (power, communication, water, fuel) and salary negotiations, “keeping with a convergent inflation path to the target goals.”