Uruguay anticipates more rate hikes to tame inflation

RIO DE JANEIRO, BRAZIL – The head of the Uruguayan central bank, Diego Labat, said he would continue to raise rates until there is a “convergence” between inflation expectations and the official target, between 3% and 6%.

The Central Bank of Uruguay (BCU) started the year early by raising the interest rate by 75 basis points (to 6.5%) last week and its head, Diego Labat, said that he plans to continue with the increases if necessary.

“The idea is to achieve the convergence of inflation expectations to the target range. To achieve this, we are going to tighten monetary policy, raising rates as necessary to ensure this convergence,” Labat told Bloomberg.

The Uruguayan central bank said it could bring it to a neutral level of 8% in early April. Labat did not rule out adopting a tightening stance if necessary.

At the height of the season, Uruguay recorded a record number of Covid-19 infections in one day.

Peru and Argentina were the other two countries in the region that also raised rates – from 2.5% to 3% and from 38% to 40%, respectively – in the first week of 2022.

Like most countries in the region, Uruguay is going through an increase in inflation, which closed in 2021 at almost 8% (above the official target between 3% and 6%, as of September). A survey conducted by the BCU estimates that inflation in 2022 will be close to 6.9%.

Uruguay’s inflation problems predate the pandemic, with the Consumer Price Index averaging 8.3% in the last decade.

But expectations of a good year for growth – which economists project at around 3% – have given Labat room to adopt a more hawkish stance and tighten monetary policy in the context of an international scenario that could be more adverse this year.

The official said that growth is likely to be “significant” in 2022, which has given the central bank room to “increase the pace” of monetary tightening.

Moreover, greater predictability in the economy will also allow the central bank to continue to provide detailed guidance on the direction of interest rates, as it did for the first time in its most recent policy statement, he said.

“Giving forward guidance is notoriously good for the functioning of monetary policy,” Labat said. “We are at a time when the level of activity allows us to be more assertive” with guidance.