Uruguay: Central Bank switches to money-supply targeting to fight off inflation
June 27, 2013
At its latest meeting on 27 June, the Central Bank announced a change in its monetary policy strategy with the aim of better fighting inflation within a context of massive inflows of foreign capital. The Central Bank switched its focus to monetary aggregates, such as money in circulation and bank deposit levels, rather than using a single monetary policy rate.
The Bank set a target of 12.5% to 13.0% annual growth for money supply (measured as M1) for the third quarter of this year, and will gradually lower this target rate until reaching 8% by the second quarter of 2015. Simultaneously, the government announced an imposition of a 50% reserve requirement on government bonds owned by non-residents and raised an existing 40% requirement on Central Bank notes to 50%. These moves aim at discouraging hot-money flows in a bid to curb dollar inflows into the economy, which caused an appreciation of the Uruguayan peso.
In the accompanying statement, the Bank also announced a widening of its annual inflation target range to between 3.0% and 7.0% starting in July 2014, from the current 4.0% to 6.0% target.