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Uruguay Monetary Policy September 2020

Uruguay: Central Bank adopts interest rate as monetary policy instrument in extraordinary meeting

At an extraordinary meeting on 3 September, the Monetary Policy Committee of the Central Bank of Uruguay decided to implement the move from the monetary aggregate to a monetary policy rate, setting it at 4.50%, which was roughly in line with the prevailing overnight interest rate level.

The Bank’s decision to adopt an interest rate as the monetary policy instrument came after the Macroeconomic Coordination Committee, in a meeting on 27 August, left the inflation target for the coming 24 months unchanged at 3.0%–7.0%, but lowered the target band to 3.0%–6.0% from September 2022. The move to an interest rate instead of the M1+ money supply provides a more transparent framework and aims to anchor inflation expectations over the medium term. Moreover, setting the new rate at 4.50%, and thus maintaining an expansionary stance, avoids any restriction on economic activity in the face of the Covid-19 health crisis.

The Bank struck a more hawkish tone in its forward guidance, stating in its communiqué that it would gradually move to a tighter policy stance as the economy recovers from the blow dealt by the coronavirus pandemic.

The next monetary policy meeting is scheduled for 24 September.

Commenting on the outlook for monetary policy, Diego W. Pereira and Lucila Barbeito, analysts at JPMorgan, reflected:

“We believe the economy is already regaining momentum. In this regard, as we noted yesterday the recent performance of services inflation suggests the slack may be not as ample as the BCU is estimating. […] If such a trend is confirmed in September, it may drive the BCU to start its gradual tightening already in November; otherwise, it could jeopardize its credibility on its medium-term disinflation path.”

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