As I had anticipated in January, The Central Bank of Uruguay (BCU) decided this Wednesday to increase the interest rate by 75 basis points to 7.25%, in line with the objective announced in January of accentuating the efforts for the convergence of inflation and the anchoring of its expectations at 24 months. in January, the monetary authority had also raised the rate by 75 points, to 6.5%, and anticipated two similar increases for the next two meetings of the Monetary Policy Committee (Copom).
According to the statement released by the Copom after its meeting on Wednesday 16, the “international context has been characterized as the most inflationary in recent decades. The new mobility restrictions caused by the spread of the omicron variant of covid-19 , the rise in energy costs, the scarcity of inputs in numerous productive supply chains due to the increase in transportation and freight costs, added to the negative supply shocks in commodities, underpin global inflationary pressures”.
He added that with this global inflationary scenario, global economic activity presents a downward revision in growth projections. The sharp deterioration in global financial conditions, due to geopolitical tensions and the possible early withdrawal of the ultra-expansive monetary policy of the US Federal Reserve, had an impact on the brake on the dynamism observed in the last quarter of the year. In this scenario, central banks worldwide are responding with a more contractionary monetary policy.
“In Uruguay, although the health situation still affects some sectors, the economy continues on the path of reactivation. The recovery of activity is reflected in the indicators of consumption, investment and exports, as well as in the labor market,” he said. the Copom.
Both inflation (8.15% year-on-year in the 12 months to January) “as well as its expectations remain outside the target range. Analysts’ expectations for 24 months stand at 6.6%, while business expectations are remain at 8%,” warned the official statement. The current inflation target range is between 4% and 7%, but from next September its ceiling will be reduced to 6%.
The Monetary Policy Committee evaluated “favorably the macroeconomic scenario, understands that the functioning of the monetary policy transmission mechanisms has been within expectations and estimates that this will be reflected in the next measurements of expectations. Therefore, it considers it appropriate to continue with the efforts to achieve the inflationary objectives and, to this end, it recommends an increase in the monetary policy rate by 75 basis points to 7.25%, in line with the course announced in January” .
The BCU Board of Directors validated this suggestion and, in the path that implies the convergence of expectations to the objective, as mentioned in the previous meeting, another increase of similar magnitude is anticipated in the next meeting of the Copom, reaching a neutral level of the interest rate (8% ) at the beginning of the second quarter of 2022.
This was the fifth consecutive rise in the interest rate since the monetary policy normalization process began last August. In the interbank market, every business day, banks lend money to each other at a daily rate (call). That rate —which the BCU sets as a policy reference— later ends up affecting the cost of money in the rest of the links in the domestic economy. The higher the rate, the more incentive for saving over consumption, something that should lead to reducing inflationary pressures in an economy.
