Uruguay: Central Bank tightens money supply to combat record-high inflation
April 7, 2016
At its 7 April 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 Q2. The target growth grate of the reference monetary aggregate M1+ was cut from 7.0%–9.0% in Q1 to 4.0–6.0% in Q2. By adopting a more contractive monetary policy stance, the Bank aims to fight high inflation, which hit an over-twelve-year high of 10.6% in March, well exceeding the Bank’s inflation target range of 3.0%-7.0%.
Monetary authorities stated that money supply growth fell short of the Central Bank’s 7.0%-9.0% target in Q1, reflecting a significant drop in demand for money on the back of an economic slowdown and increased portfolio dollarization. Against this backdrop, the Bank decided to tighten its monetary growth target for Q2, arguing that the new target is consistent with both a return of inflation to within the target range and higher potential economic growth in the medium term. Regarding GDP growth, the Bank pointed out that Uruguay’s economy decelerated, but held up fairly well compared to its regional peers. Moreover, the Bank assessed the government’s fiscal consolidation efforts positively and emphasized that lowering inflation was a top priority. The next Monetary Policy Committee meeting will take place in early July.