The Central Bank of Uruguay (BCU) decided to start a “contractive phase” on Tuesday” (raise the cost of money) of the monetary policy to anchor inflation expectations to its policy objective.
After the meeting of the Monetary Policy Committee (Copom), the Board of Directors of the Central Bank of Uruguay (BCU) decided to increase the monetary policy interest rate (MPR) by 75 basis points (0.75%), up to 9.25%.
“This increase allows us to enter the contractionary phase of monetary policy in line with what was announced in the two previous meetings of the Monetary Policy Committee (Copom),” the monetary authority said in its statement.
Furthermore, in “the sgradual entry into the contractionary phase of monetary policy, at least two additional increases of 50 basis points (0.5%) are expected in the next Copom meetingsuntil bringing the interest rate to levels consistent with the convergence of the BCU’s projections to its inflation target”. As of September of this year, the inflationary target range will be lowered by 1 point from its ceiling, to a range of 3% to 6 %.
Inflation expectations for 24 months now stand at 6.8%. Since the BCU considers a 2% real rate to be neutral, an interest rate above 9% should be considered contractionary. That policy should encourage savings to the detriment of consumption and, therefore, less pressure for a rise in prices in the Uruguayan economy.
For the monetary policy decision, different aspects of the national and international situation were assessed, Copom explained in its statement.
In Uruguay, both inflation (8.4% in the 12 months to April) and inflation expectations (6.8%) remain outside the target range, while economic activity has recovered to levels above the pre-pandemic, which is reflected in good labor market indicators.
“In the world, inflation also continues to suffer upward pressure. This fact provokes the increasingly contractionary reaction of the main central banks, in particular the Federal Reserve of the United States (Fed). In this situation, the instability and the low world and regional growth, the greater deterioration of financial conditions and the greater global inflationary pressures, constitute the main risks to monitor”, indicated the monetary authority.
In this national and international context, “the operation of the transmission channels of monetary policy was positively evaluated, which are operating in the expected direction.”
