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The BCU raised the interest rate to 11.5% and indicated that there will be a pause in the coming months

The BCU raised the interest rate to 11.5% and indicated that there will be a pause in the coming months

The Central Bank of Uruguay (BCU) increased this Friday the monetary policy interest rate (TPM) by 25 basis points (0.25%), up to 11.5%seeking to anchor the inflation expectations of economic agents.

After the meeting, the Monetary Policy Committee (Copom) indicated that annual inflation stood at 8.46% in November, almost one and a half percentage points below the highest measurement of the year (9.95% in September). “marking a convergence faster than expected” at the previous meeting.

The decision implies a moderation with respect to previous increases. In October, the BCU had increased the rate by 50 basis points to 11.25%. Since that meeting, inflation expected by the median of analysts in the 24-month horizon (relevant for monetary policy) was 6.8% from a previous 7%, according to the BCU survey. This is just under 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 continue to be the most unanchored and project inflation of 9% for the next 24 months.

For the decision, the Copom valued aspects of the international and local situation. In this sense, he pointed out that in Uruguay, the forecast of economic growth of the Gross Domestic Product (GDP) by the end of 2022.

The BCU projections for 2023 and 2024, which include the start-up of the new UPM pulp mill, were also evaluated.

He also highlighted that the world scenario shows “less pressure” from commodity prices on inflationreestablishment of global supply chains, an accumulation of natural gas from other regions, along with favorable activity indicators for the Euro Zone and expectations of a recovery in China’s dynamism.

“This increase continues to deepen the contractive bias of the monetary policy that began in August 2021. Although in the current context no further increases in the interest rate are envisioneds, the committee will continue to monitor the local and international situation in order to ensure that both inflation and its expectations converge to the target range towards the end of the monetary policy horizon,” the official statement said.

On the other hand, the economist, Aldo Lema, pointed out that the action and the message of the BCU “seem reasonable.” In this sense, he explained that the rate was raised as suggested by the monetary policy rule and his previous signals, it was done at a lower rate (only 25 basis points) and in turn a pause of 11.5% was indicated for the coming months. .

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. The higher the rate, the more incentive to save on consumption. Some economic analysts have been critical of this BCU policy because of its side effects on the economy and also because it tends to depreciate the dollar against the Uruguayan peso.

The next Copom meeting is scheduled for February 15, 2023.

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