Uruguay continues ‘contractionary’ monetary policy

The Central Bank of Uruguay ordered a 50 basis point increase in the policy rate on July 6, in its eighth straight increase since last August.

The move, which brings the policy rate to 9.75%, means the central bank has ordered 525bp of increases in total over the past 11 months. The 50bp hike was somewhat smaller than the four previous hikes, which included April’s 125bp increase and three 75bp hikes.

In its press statement, the central bank’s monetary policy committee reaffirmed it would stick to what it calls “the contractionary phase of monetary policy”. The committee announced the beginning of this phase at its May 2022 monetary policy meeting. In its July 6 press release, it predicted more increases at coming meetings.

Uruguay’s official statistical Institute recorded consumer price index inflation of 9.29% in June, slightly below the 9.37% recorded in both April and May. CPI inflation has stabilised at a level well above its 3–7% target range in recent months, according to official statistics. The central bank noted the “rigidity of inflation expectations” in explaining its decision to hike rates.

From September, the ceiling of the target range falls to 6%.

Gabriela Mordecki, an economist at the University of the Republic in Montevideo, told Central Banking that the central bank defines its “contractionary phase” as a policy rate above the inflation rate. Policy-makers are also taking into account their expectations that inflation rates will fall going forward, she said.

Mordecki noted that the Uruguayan government recently projected that inflation would fall to 6.7% next year, and 5.8% in 2024, just within the central bank’s target range. However, some analysts believe inflation in 2024 will still be above the 6% ceiling, she added.

In its press release, the MPC acknowledged that “inflation and inflation expectations continue outside the target range”, but noted that the economy was doing well. The central bank said increased internal and external demand, a stronger tourism sector and “large investment projects” had driven economic recovery.

The Uruguayan economy grew by 0.6% in the first quarter of 2022, the central bank said in June. GDP grew by 8.3% between the first quarter of 2021 and 2022, according to its figures.

The central bank’s board announced on July 5 that it was intervening in two brokerage firms. Authorities said the two businesses had caused significant losses to their clients without having informed them of these.