The Central Bank of Uruguay (BCU), resolved this Wednesday to reduce the monetary policy interest rate (TPM) by 25 basis points, from 11.5% to 11.25%seeking to anchor the inflation expectations of economic agents.
This “after making a positive assessment of the gradual decline in inflation in the last six months and the expected consolidation of this trend in the coming months,” according to the official statement.
The March record placed annual inflation at 7.33%. The Monetary Policy Committee (Copom) pointed out that this data “confirmed the slowdown observed since October 2022”, despite the temporary effects of the drought.
“In particular, core inflation –excludes volatile components such as food and energy- fell more sharply and stands at 6.16%, the lowest level in the last 5 years and very close to the ceiling of the target range”, says the statement of the meeting.
In addition, he explained that the average of the inflation expectations indicators monitored by the BCU “remained stable in the quarter and is a permanent focus of attention.”
However, currently the inflation expected by the median of analysts in the 24-month horizon (relevant for monetary policy) stands at 6.85%, according to the BCU survey in April. This is almost 1 percentage point above the ceiling of the target range (between 3% and 6%) and still far from the center of the range (4.5%).
For his part, the expectations of Uruguayan businessmen continue to be the most unanchored and project inflation of 8% for the next 24 months.
Analysts reading
The Economist jose licandro stated on his Twitter account that with the decision “clearly the government threw in the towel against inflation.”
“He should at least be careful not to fall into obvious contradictions: he lowers the MPR while posting higher inflation expectationson the eve of important salary negotiations and Accountability”, he said.
Clearly the Government (via @bcu) threw in the towel against inflation. At the very least, he should be careful not to fall into obvious contradictions: he lowers the MPR while posting higher inflation expectations.
On the eve of important salary negotiations and Accountability. https://t.co/kWH0HqoF7m— jose licandro (@ licandro1) April 19, 2023
CPA economist Ferrere, Nicholas Cichevskiaffirmed that previously the Copom “pressed” by the current situation of the real exchange rate, faced the dilemma of maintaining or lowering the monetary policy rate.
“The drought and the slowdown in inflation – and to a lesser extent expectations – could justify a reduction, but this could compromise the objective of bringing inflation below 6% in 2024,” he wrote.
In turn, given that this meeting may have been the one prior to the announcement of the salary guidelines, “Getting inflation to converge to 5.8% will require that the agreements incorporate that level of inflation,” he added.
For his part, the economist Aldo Lema pointed out that market rates did not reflect a MPR cut during this second quarter, but were already pointing to declines since the second half.
Lema stated on his Twitter account among the possible effects of the rate drop “some upward pressure on the exchange rate”, falls in nominal rates, especially short ones, and “some rise in inflation expectations”.
Situation analysis
For the decision adopted this Wednesday, aspects of the regional, international and local situation were assessed.
As explained, in the global economic environment, inflation “shows rigidity”, with a slower than expected decline, and economic activity “shows signs of lower growth” in the margin due to the financial restrictions derived from the banking crisis in the United States and Europe.
In contrast, they added, the growth prospects for the Chinese economy continue to be revised upwards after the progressive lifting of sanitary restrictions. Meanwhile, lower economic growth is expected in the region.
Regarding Uruguay, The Copom expressed that the activity grew 4.9% annual average in 2022, where the first effects of the drought were observed in the last quarter. These effects were observed in the CPI in the first months of 2023, affecting the prices of fruits and vegetables upwards.
“Based on these considerations and given the current process of consolidating a downward trend in inflation, the BCU Board of Directors decided to reduce the Monetary Policy Rate (TPM) by 25 basis points to 11.25%,” says the release.
“This decision is consistent with the continuity of the contractive monetary policy and with the objective of continuing the efforts for the convergence of inflation and their expectations, still rigid, in the monetary policy horizon. The future movements of the TPM will be conditioned by the evolution of the inflation expectations of the different economic agents”, he added.
The next Copom meeting is scheduled for Wednesday, May 16.
In the interbank market, banks lend each other money every business day at a daily rate (call). This rate —which the BCU sets as a policy reference— then ends up affecting the cost of money in the rest of the links of the domestic economy.
Some economic analysts and Until now, agro-export businessmen had been critical of the contractionary policy followed by the BCU in recent times, due to its collateral effects on the progress of the economy and the weakening of the dollar.
