Uruguay Monetary Policy July 2016

Uruguay

Uruguay: Central Bank tightens money supply to combat double–digit inflation

July 8, 2016

At its 7 July Monetary Policy Committee meeting, the Central Bank decided that it will reduce the target growth rate of money supply—its main monetary policy instrument—in Q3. The target growth grate of the reference monetary aggregate M1+ was cut from 4.0–6.0% in Q2 to 1.0%–3.0% in the third quarter of the year. By adopting a more contractive monetary policy stance, the Bank aims to fight high inflation, which crossed into double digits in February and has been following an upward trend since then. Inflation currently exceeds the Bank’s inflation target range of 3.0%-7.0%.

Monetary authorities noted that high inflation was due in part to inclement weather that pushed up food prices, and a currency depreciation that has increased import prices. As the weather related shock to food prices was expected to abate, the Bank suggested that inflationary pressures with respect to food should begin to ease later this year. Regarding the growth rate of money, the Bank noted that there was practically zero growth in the monetary base in the second quarter. The was owed primarily to a decrease in the demand form money by consumers and suggested the excess slack in the economy is beginning to drag on inflation. The next Monetary Policy Committee meeting will take place in early August.

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Panelists participating in the LatinFocus Consensus Forecast expect M1+ to grow 7.6% in 2016. For 2017, the panel sees the monetary aggregate expanding 7.4%.


Author:, Senior Economist

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