Uruguay’s central bank raised its key interest rate to ensure inflation expectations are in line with its target range and said future changes in the monetary policy stance would depend on how inflation expectations react to this change move along with the economy and the COVID-19 pandemic.
The Central Bank of Uruguay raised its monetary policy rate by 50 basis points to 5.0 percent, the first change in its rate since September last year when it adopted a policy rate and abandoned targeting money supply to control inflation that has plagued the country for decades.
Uruguay becomes the 22nd central bank that has raised its key interest rates this year in response to growing inflationary pressures and the fourth central bank in Latin America after Brazil, Chile and Mexico.
The rate hike follows months of warnings by the central bank about the need to raise rates to control inflation once the economy begins to recover from the pandemic, which led to a 5.9 percent contraction in the country’s gross domestic product last year.
At its previous meeting on July 6, for example, the bank’s monetary policy committee (Copom) said it was still waiting for more signs on a recovery of economic activity but once this starts, interest rates will be raised gradually to affect inflation expectations.
Today, Copom said the health situation in Uruguay had improved “substantially,” and economic activity is showing signs of recovery, with progress in various sectors and unemployment is falling.
“Within this framework, the Committee understands it is necessary for monetary policy to begin to leave its most expansive phase in order to follow a gradual path of adjustment of the interest rate and, therefore, to increase the monetary policy rate to 5%,” the central bank said.
As long as there are no setbacks in the health situation, the priority of monetary policy will be to drive inflation expectations to the center of the target range of 3.0 to 6.0 percent, the bank added.
Inflation in Uruguay has been declining steadily in recent months to 7.3 percent in June and July from over 9 percent in February but remains above the central bank’s target range.
In its second quarter monetary policy report from last month, the central bank forecast inflation would average over 7 percent this year due to higher fuel costs and commodities but then return to its target in the second quarter of 2022.
After last year’s economic contraction, the central bank expects the economy to expand 3.5 percent on average the year, with growth slowing somewhat in 2022.
In the first quarter of this year Uruguay’s GDP shrank 2.8 percent year-on-year, the sixth consecutive quarter of contraction on an annual basis.
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