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Monday, March 27, 2023

What will the Fed do after the inflation data and what will happen in Uruguay?

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The United States Bureau of Labor Statistics released the numbers of the inflation February, and the figures did not turn out as expected by the government of that country. Although they did not worsen, the truth is that they did not improve at the rate expected, and the Federal Reserve (Fed) faces the diatribe of raising or not interest rates reference after bank crash of the weekend. Meanwhile in Uruguay the expectation of what will happen at the local level and the impact that this measure will have on the dollar price.

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The YoY inflation in the United States during February it was 5.5%, as most economic analysts expected. However, the Underlying inflation rose 0.5%, reaching the highest peak in the last five months and beating estimates of +0.4%.

In one way or another, the reality is that inflation did not drop and, as had been speculated in recent weeks, the Fed should raise benchmark interest rates againin line with the monetary policy that it has been carrying out in recent months.

However, this situation, which just a week ago would not have generated much debate, today puts the Federal Reserve between a rock and a hard place: with the bankruptcy of the Silicon Valley Bank (SVB) —the biggest bankruptcy of a US bank since 2008— and the bailout of the state agency to guarantee deposits, as well as making it easier for banks to obtain credit dragged down by the collapse of the system, must decide whether to maintain rates at the cost of not be able to cope with inflation: or if it rises and, on the other hand, that the measures taken between Friday and Monday due to the banking crash turn against it.

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Faced with the financial dilemma that lies ahead for the United States, analysts expect the Fed to raise rates by a much smaller proportion than initially considered or, ultimately, to lean towards keeping them frozen.

The reflection of the monetary policy of the United States in the measures of the BCU

Meanwhile, and although local analysts agree that the bank collapse will not have repercussions in Uruguay, there is a possible effect of the decisions made by the Federal Reserve next week, and it will be seen in what happens in the reference rates of the Central Bank of Uruguay (BCU).

In recent days, the expectations of the various financial and productive sectors were that, faced with the possible drop in benchmark interest rates by the Fed, the BCU would be pressured to do the same in the framework of the next meeting of the Monetary Policy Committee (Copom)which will take place in April.

In the country, the interest rate of $11.50 has been a central issue in the financial debate for months, since industrialists, analysts and the agro-export complex assign it the reason for the strong depreciation of the dollar, which is affecting the competitiveness of the economy. And although the goals of the monetary authority provided for a less contractive policy, accompanying the drop in inflation, the dramatic impact of the drought could boost consumer prices and leave plans truncated, which could eventually affect the price of the dollar. more competitive.

With the inflation numbers not so favorable in the United States, this scenario could be brought forward if the Fed increases the reference interest rates. However, in the banking crash scenario, the freezing or lowering of the Monetary Policy Rate (TPM) in the country could be consolidated.

In this sense, for the stockbroker Diego Rodriguez, partner in Gaston Bengochea, it will be very difficult for the Federal Reserve authorities to “justify continuing with a contractive monetary policy, therefore we are facing the desired”pivot‘” which would mark an improvement with respect to the Uruguayan exchange rate delay.

Along the same lines, the economist and analyst Nicholas Lussich, in dialogue with scope.com He considered that if the rates were finally lowered in the United States, the arguments of the economic agents in favor of a reduction in Uruguay would grow.

Source: Ambito

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