Uruguay: Central Bank of Uruguay unexpectedly cut rates in July
Bank surprises markets with a cut: At its meeting on 8 July, the Central Bank of Uruguay (BCU) unanimously decided to lower its policy rate by 25 basis points to 9.00%, surprising markets, which had expected no change. This marks the first rate cut since April 2024, and follows a cumulative 100 basis points of hikes implemented since then.
Lower inflation and easing economic uncertainty drive the cut: Looking at the factors that influenced the decision, domestically, inflation fell in June and two-year ahead inflation expectations reached new historic lows and remained within the Bank’s 3.0–6.0% tolerance range for the third consecutive month. On the international front, the recent weakening in the U.S. dollar vs the Uruguayan peso—which cheapens imports for Uruguay—along with a slight easing in trade and geopolitical uncertainties provided additional motivation for the rate cut.
Easing cycle to continue ahead: The BCU indicated that if disinflation progresses as expected and consumer expectations regarding prices continue to decline, there could be room for further rate reductions. In line with this, the majority of our panelists expect further rate cuts by the end of 2025. Potential inflationary pressures stemming from the Orsi administration’s policies aimed at raising real wages and pension payments are an upside risk to rates; a weaker-than-expected USD is a downside risk to them.
The BCU is scheduled to reconvene on 19 August.
Panelist insight: Commenting on the outlook, analysts at Itaú Unibanco stated:
“The central bank seems to be comfortable with inflation and inflation expectations convergence. Therefore, we anticipate at least a further cut in the policy rate for the rest of the year, provided that inflation and inflation expectations continue to decline.”