Uruguay: Central Bank raises its monetary policy rate in August
August 11, 2021
At its 11 August meeting, the Monetary Policy Committee of the Central Bank of Uruguay decided to raise the monetary policy rate by 50 basis points to 5.00%. The decision marked the first rate hike since the committee adopted a monetary policy rate and abandoned seven years of targeting money supply to control inflation back in September 2020.
The Central Bank opted to hike the monetary policy rate in a bid to tamp down on inflationary pressures, as inflation in June–July averaged above the upper bound of its 3.0%–7.0% target range. Moreover, the Bank set a new target band for inflation over the next 24 months of between 3.0%–6.0%. The Bank made a pivot from supporting the economic recovery to staving off price pressures due to signs of healthier economic prospects in advanced economies, and stronger activity domestically—supported by an improving health situation and falling unemployment.
Looking ahead, the Bank took a more hawkish stance, explaining “as long as there are no setbacks in health matters, the priority of monetary policy will focus on driving inflation expectations to the center of the target range of 3% to 6% in the monetary policy horizon.” As such, the majority of our panelists see an additional 50 basis-point increase in the monetary policy rate before year-end.
Commenting on the latest monetary policy meeting, Diego W. Pereira, economic and policy economist at JPMorgan, noted:
“In all, given the information unveiled today regarding the COPOM’s reaction function and our base case for continued activity recovery ahead, we now see a quicker convergence to positive ex-ante real rates. We thus assume the COPOM is to hike the policy rate in two of the three remaining policy meetings of the year, by 50bp each time, so for the policy rate to converge to 6.0% by December. That assumes 24-m inflation expectations are to converge inside the target range by November. For December 2022 we now pencil in the policy rate at 7.5%. We also lower 2023 and 2024 inflation expectations, to 4.8 and 4.7%, respectively.”
The next monetary policy meeting is scheduled for 5 October.
Author: Steven Burke, Economist