Home South AmericaUruguay The BCU cut the interest rate, after a sharp drop in inflation in June

The BCU cut the interest rate, after a sharp drop in inflation in June

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The BCU cut the interest rate, after a sharp drop in inflation in June

The Central Bank of Uruguay (BCU), resolved this thursday reduce the monetary policy interest rate (TPM) by 50 basis points, from 11.25% to 10.75%seeking to anchor the inflation expectations of economic agents.

The decision was made a day after official data showed a sharp slowdown in inflation in June (-0.46%), and which brought the record for the last 12 months to 5.98%, that is, above the ceiling of the target range established by the authorities (3% to 6%). The drop was influenced by the lower cost of fruits and vegetables, fuel, and the appreciation of the peso.

The Monetary Policy Committee (Copom) highlighted that inflation headlining and core inflation (5.2%) are at levels not seen since 2017 and 2009, respectively. “Both inflation indicators accentuate the slowdown that has been taking place since October of last year,” the statement said.

The expectations

Currently, the inflation expected by the median of analysts in the 24-month horizon (relevant for monetary policy) stands at 6.67%, according to the BCU survey. This is slightly less than 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 their part, the expectations of Uruguayan businessmen remain unanchored and project inflation of 8% for the next 24 months, according to the survey carried out by the National Institute of Statistics (INE). Those expectations have remained unchanged since last December when they moved one point lower.

The Copom “It expects further reductions in expectations in the next measurements based on the observed data and the current instance of monetary policy. It was assessed that the reduction in inflation comes at an opportune moment to reduce inflationary inertia in wage negotiations, which continue to be a risk to inflation forecasts”, added the statement.

On April 18, the Copom had lowered the interest rate by 25 basis points to 11.25%, after 12 consecutive increases, where the TPM went from 4.5% in July 2021 to 11.5% last December . And at the May meeting it had remained unchanged. With this Thursday’s decision, monetary policy becomes less contractive.

During the remainder of the year, the Copom will meet four more times. Today market expectations point to lower nominal rates in the coming months. For the end of this year, a cut of 100 basic points is expected, which would place it at 10.5%.

The CPA Ferrere economist, Alfonso Capurro, had indicated days ago that the drop in inflation to target range levels would be an “important moment” for the BCU, because he would be able to say that his “tough” monetary policy had results, and with this he could put together a “speech” more aligned with the interest rate cut.

Situation analysis

For the decision adopted, aspects of the international, regional and local situation were assessed.

The drop in rates is also a sign that the agro-export sector has demanded, in a context of a sharp decline in the dollar in the local market in recent weeks. The currency showed a rebound at the beginning of July and this Thursday rose 1.15%, trading at $38.33, in the interbank average.

The next Copom meeting is scheduled for Tuesday, August 15.

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.

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