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Uruguay Monetary Policy April 2020

Uruguay: Central Bank intervenes to support credit and liquidity; lowers M1+ target

At its monetary policy meeting on 16 April, the Central Bank of Uruguay decided to lower its target for the growth rate of the M1+ money supply in the second quarter, due to expected lower demand for M1+ given projected economic weakness. The meeting was preceded by two subsequent decisions on 19 March and 1 April, in which the lender adopted measures to stimulate credit extension and inject liquidity into the financial system, as part of efforts to cushion the economic impact of Covid-19 lockdown measures.

On 16 April, the Bank lowered its target for the growth rate of the M1+ money supply in Q2 2020 to 3.0%–5.0%, from the previous quarter’s target of 6.0%–8.0%. The decision was taken against the backdrop of worsening economic activity, a sliding peso, elevated inflationary pressures and as it expected M1+ demand to moderate in Q2 due to the economic hit from coronavirus. Moreover, it set its inflation target for the next 24 months at 3.0%–7.0%, “or also at more stringent levels”.

Earlier in April, in a bid to boost credit and shield the economy from the coronavirus blow, the lender reduced the reserve requirements for commercial banks conditional on an expansion in credit portfolios. The move followed a decision in mid-March through which the Bank authorized financial institutions to relax deadlines on loan payments—both interest and principal—for households and businesses hit by the coronavirus crisis. Specifically, it deferred loan payments for up to six months, although the monetary authority underlined the measure was not to be read as a debt restructuring.

The emergency measures should provide some relief to businesses and households, although it remains to be seen how the Central Bank will balance the need to provide support to the economy while handling stubbornly high inflation.

According to the new calendar of monetary policy meetings, the next monetary policy meeting is scheduled for 21 May.

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