RIO DE JANEIRO, BRAZIL – On May 17, the Central Bank of Uruguay (BCU) decided to increase the reference rate by 75 basis points to 9.25%. The decision of a seventh consecutive increase was communicated after the meeting of the regulator’s Monetary Policy Committee (Copom); at the same time, the institution anticipated at least two new 50 basis point increases in upcoming meetings in the “gradual” entry into a “contractionary phase” of monetary policy.
“This increase allows entering the contractionary phase of monetary policy in line with what was announced in the two previous meetings of the Monetary Policy Committee,” the BCU said in a statement issued on May 17.
The regulator seeks to anchor inflationary expectations, still far from the target range that will be between 3% and 6% from September. “On the path of gradual entry into the contractionary phase of monetary policy, at least two additional 50 basis point increases are expected in the next Copom meetings until bringing the interest rate to levels consistent with the convergence of the BCU’s projections to its inflation target,” the institution added.
This scenario will place the monetary policy rate at 10.25% in August. The next Copom meeting is scheduled for July 6 and the following one for August 15.
The increase continues a path of hikes initiated in August last year from a benchmark rate of 4.5% up to that time. The first increase was by 50 basis points, the second by 25 basis points, and the third again by 70 basis points to bring the rate to 5.75% at the end of last year. During this year, the increases were 75 basis points in January and February, and in April, there was an increase of 125 basis points.
Inflation in Uruguay stood at 9.37% in the 12 months ended April, a level similar to the 9.38% recorded in the interannual measurement of March. Thus, the Consumer Price Index stabilized in the last month, after the acceleration it had shown at the beginning of the year.
The BCU assessed in its statement that while inflation and expectations remain outside the target range, economic activity “has recovered to levels above pre-pandemic levels, which is reflected in good labor market indicators.”
“Globally, inflation also continues to come under upward pressure. It leads to an increasingly contractionary reaction from the major central banks, particularly the US Federal Reserve (Fed). At this juncture, instability and low global and regional growth, the further deterioration of financial conditions, and greater global inflationary pressures are the main risks to monitor,” added the Uruguayan regulator.
With information from Bloomberg Línea