Uruguay Central Bank Sharpens Hawkish Message Amid Strong Growth
Uruguay’s central bank will keep raising interest rates in the coming months and may even implement a contractionary monetary policy to bring inflation expectations to the 3% to 6% target, according to its top policy maker.
Led by former Banco Santander executive Diego Labat, the bank increased its key rate by 75 basis points to 6.5% on Jan. 5, becoming the first in the region to tighten monetary policy this year, and signaled it could push it to a neutral level of 8% by early April. Labat didn’t rule out adopting a restrictive stance if necessary.
“The idea is to achieve the convergence of inflation expectations with the target range. We are going to tighten monetary policy, raising rates by whatever is needed to achieve that convergence,” he said in an interview from Montevideo.
Latin America suffered some of the world’s highest inflation rates last year due to weak currencies and soaring food and energy prices. Consumer prices are expected to remain above target in many of the region’s major economies well into 2022 and beyond even as central banks keep withdrawing stimulus.
Uruguay was an inflation outlier in the region long before the pandemic upended the global economy with consumer prices averaging 8.3% in the last decade. Annual inflation held stubbornly close to 8% the past three months, while economists surveyed by the central bank see it only slowing to roughly 6.6% in late 2023.
Labat’s goal of lowering inflation without choking off the recovery got a helping hand from surprisingly strong third-quarter growth that led analysts to mark up their forecasts for gross domestic growth. They now see the economy expanding 3.3% this year after an estimated 4% in 2021.
Growth will probably be “important” this year, and that has given the central bank room to “increase the pace” of monetary tightening, he said.
Labat dismissed Argentina’s debt talks with the IMF, elections in Brazil this year and the spread of the omicron variant as significant risks to the economy at this time.
Greater visibility about the path of the economy also means the central bank will 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. “Right now we are at a point in time where the level of economic activity allows us to be more assertive” with guidance.
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