Uruguay: Central Bank on hold in December
December 23, 2020
At its final meeting of 2020 on 23 December, the Monetary Policy Committee of the Central Bank of Uruguay decided to leave the overnight interest rate—its newly implemented monetary policy rate—unchanged at 4.50%.
The decision to hold the rate largely reflected elevated uncertainty regarding the economic backdrop and easing inflationary pressures. Although the Bank confirmed that domestic activity recovered somewhat in the third quarter, it likely slowed down in Q4, with the tourism sector markedly affected by the closure of borders and other domestic containment measures. Moreover, heightened uncertainty regarding both the regional and international economic situation amid the continued presence of Covid-19 poses a downside risk. As such, keeping an accommodative stance avoids any further restriction on economic activity and ensures liquidity in the financial system. Turning to price pressures, inflation continued its downward trend in November, inching down to 9.6% (October: 9.7%). That said, it still remained well above the Bank’s 3.0%–7.0% target range.
With regard to forward guidance, the Bank stated in its communiqué that the uncertain economic environment, both in a domestic and international context, calls for an expansionary stance for now. However, a move towards a more contractionary stance—with a moderate hike of the monetary policy rate—may come when conditions allow for it and if inflation expectations continue to decline.
The next monetary policy meeting is scheduled for 11 February.
Author: Hanna Andersson, Economist