Uruguay Lifts Key Rate to 5% With Inflation Above Target

(Bloomberg) -- Uruguay’s central bank tightened monetary policy for the first time since it reintroduced a benchmark interest rate last year as it pivots from aiding the economy to fighting above-target inflation. 

Policy makers lifted the key rate by a half-point to 5% from the 4.50% set last September following seven years of failing to tame chronically high inflation through targeting changes in the money supply. The increase was above the 4.75% median estimate in a Bloomberg survey of economists.

With the pandemic easing and economy well on its way to recovery, the central bank decided it was time to start gradually tightening monetary policy that remains expansive at 5%, chairman Diego Labat told reporters in Montevideo

“As long as there aren’t setbacks in the health situation, monetary policy will continue to be focused on taking inflation expectations to the center of the target range,” he said.

Uruguay joins other countries in the region like Brazil and Chile that are lifting interest rates to contain rising consumer prices. Mexico is expected to increase its borrowing costs further Thursday, while some analysts see Peru doing the same during a monetary policy meetings on the same day.

Inflation held steady at 7.3% last month on higher food, transportation and services prices after surging above the central bank’s 3% to 7% target in June. The central bank said its new target range for the next 24 months is 3% to 6%. 

The start of a tightening cycle suggests the economy is on a firmer footing after contracting 2.8% in the first quarter. The leading indicator published by local think tank Ceres expanded for a fourth-straight month in July with the diffusion index showing expansion in 90% of sectors.

The Finance Ministry forecast 3.5% growth this year in the annual budget bill submitted to Congress in June, compared to private sector estimates of 3%.

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