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Uruguay Monetary Policy July 2018

Uruguay: Central Bank lowers M1+ target growth range in July

At its 13 July monetary policy committee meeting, the Central Bank of Uruguay left its inflation target range for the next 24 months unchanged at 3.0%–7.0%. The Bank confirmed the average growth rate of the M1+ money supply was 11.5% in Q2, in line with its earlier forecast. Meanwhile, the Central Bank decided to lower the M1+ target growth rate, its main policy tool, to a range of 9.0%–11.0% for Q3 from 11.0%–13.0% for the previous quarter, against the backdrop of intensifying inflationary pressures in recent months.

Inflation jumped well above the Bank’s target range in June, accelerating from May’s 7.2% to 8.1%. Largely on the back of soaring food prices, June’s print marked the second consecutive month of above-target inflation and the highest reading since January 2017. Core prices were also partly behind the acceleration, likely impacted by Uruguay’s peso depreciation amid ongoing macroeconomic uncertainty in Argentina and Brazil. The currency effect due to a weaker peso and solid economic activity growth compelled the Bank to tighten its monetary policy stance. The decision was also driven by the Bank´s aim of keeping inflation expectations under control in the current economic environment.

The Bank’s statement was again devoid of strong forward guidance. In its communiqué, the Bank announced that the lower M1+ growth rate would tighten the monetary policy environment sufficiently to ensure inflation returns to the target range in the short- to medium-term. A more contractionary monetary policy stance should also help keep inflation expectations under control. Nevertheless, our panelists do not see the inflation rate returning to the Bank’s target range before 2020, which signals that another round of monetary policy tightening is likely in the coming quarters.

The following monetary policy meeting is scheduled for October 2018.

Uruguay M1+ Forecast

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