Uruguay Monetary Policy April 2017


Uruguay: Central Bank allows for faster growth in M1+ to avoid constraining recovery in activity

April 6, 2017

At its 5 April Monetary Policy Committee meeting, the Central Bank decided to increase the target growth rate of money supply—its main monetary policy instrument—from a range of 3.0%–5.0% in Q1 to 9.0%–11.0% in Q2 2017. By adopting a less contractionary monetary policy stance, the Bank aims to satisfy increasing money demand, while maintaining its focus on reducing inflation.

In March inflation fell within the Central Bank’s 3.0%-7.0% target range for the first time in over six years, following a significant decline in recent months fueled by lessening price pressures in both tradable and non-tradable goods sectors. The appreciation of the Uruguayan peso since mid-2016 clearly played a role in this downward dynamic. Moreover, money demand continued to grow in the first quarter of this year on the back of a pickup in economic activity. These factors, along with a persistent weak external sector and lower inflation expectations, gave the Central Bank space to ease monetary conditions. The move was designed to support domestic demand and preserve the economy’s growth momentum in the face of a volatile external environment.

The statement was devoid of strong forward guidance, although the Bank reiterated its commitment to continue monitoring the future evolution of the economy in order to reduce inflation. With the recovery set to continue in the quarters ahead, some monetary tightening is foreseeable.

Against this backdrop, panelists participating in the LatinFocus Consensus Forecast expect M1+ to grow 5.6% in 2017. For 2018, the panel sees the monetary aggregate expanding 6.0%.

Author: Massimo Bassetti, Economist

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