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Uruguay Monetary Policy August 2020

Uruguay: Central Bank increases M1+ target and initiates move to interest rate

At its meeting on 8 August, the Monetary Policy Committee (COPOM) of the Central Bank of Uruguay decided to raise its target for the growth rate of the M1+ money supply in Q3 2020 to around 15% from 7.0%–10% previously. Meanwhile, it left the inflation target for the coming 24 months unchanged at 3.0%–7.0%. It also announced it has started the process of changing its monetary policy instrument from the monetary aggregate to an interest rate.

The Bank’s decision to raise its target for the M1+ money supply for Q3 was mainly driven by a larger-than-expected demand for money in July as economic uncertainty due to the coronavirus crisis continued to generate precautionary behavior among consumers and businesses. M1+ growth in July came in at 15.5% year-on-year, above the previous meeting’s target. Meanwhile, although inflationary pressures softened somewhat in July compared to the previous month (July: 10.1%; June: 10.4%) on more subdued movement in the tradable sector, they still remained elevated. The move to increase the liquidity target for Q3 therefore reflected the need to sustain a recovery in economic activity despite high inflationary pressures.

Moreover, the Bank’s decision to begin changing its policy instrument from a benchmark monetary aggregate to an interest rate was made in accordance with the economic backdrop and the inflation expectations. The specificities of the policy rate are not yet available, however.

Looking ahead, further policy easing in the short term is likely as the Bank remains committed to providing necessary liquidity and to avoiding any restriction in the money market in the face of the current health crisis. The next monetary policy meeting is scheduled for 24 September.

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