After the last meeting of the Monetary Policy Committee (Copom) this Wednesday, the Central Bank of Uruguay (BCU) defined reduce by 25 basis points the monetary policy rate (TPM), better known as the interest rate, from 11.5% to 11.25%.
This is the first time that the entity has decided to lower it since the extraordinary meeting of the Copom in September 2020, in the midst of the coronavirus pandemic, when it began to use it to stop the inflationary process.
The group of experts evaluated as “positive” the gradual slowdown in inflation in the last six months. In March, the Consumer Price Index (CPI) year-on-year of the National Institute of Statistics (INE) was located in 7.33%; while in February it had been 7.55%. “In this way, it confirmed the slowdown that has been observed since October 2022, despite the temporary effects of the drought,” observed Copom.
The decision took a large part of the financial sector by surprise, which expected a new rate freeze in April, with an eventual postponement of the reduction until the next meeting.
As expressed, “the continuity of the contractionary monetary policy” of high rates seeks to “continue the efforts for the convergence of inflation and its expectations, still rigid”.
The detail of the BCU’s decision to reduce the monetary policy rate
In addition to the decline in general inflation, the BCU statement also highlights the values of the Underlying inflationwhich last month “fell more sharply” and stands at 6.16%, “the lowest level in the last 5 years and very close to the target range” (between 3 and 6%).
As for the inflation expectations, a point that the Copom anticipated as key in the future of the level of the reference rate at the last meeting, the Central Bank stressed that on average “it remained stable in the quarter”, although it continues to be “permanent focus of attention” of the Committee . In fact, the group of experts assured that the following movements of the TPM will continue to be conditioned to the evolution of this variable.
Factors of the global context and the local situation of Uruguay
In turn, the BCU explained that among the foundations of its decision was the analysis of the regional, international and local situation. “In it global economic environmentinflation shows rigidity, with a slower decline than expectedand the economic activity exhibits signs of lower growth in the margin due to the financial restrictions derived from the banking crisis in the United States and Europe“, the statement said.
In parallel to the lower growth expected for the region, the Chinese economy registers an increase in its growth prospects after the lifting of its sanitary restrictions, the document warns. “In Uruguay, activity grew 4.9% annual average in 2022where the first effects of the drought. These effects were observed in the CPI in the first months of 2023, affecting the rising prices of fruits and vegetables“, observed the Copom.
According to the calendar of the highest financial institution in the country, the next Copom meeting will be the Wednesday May 16.
The reactions of the analysts, what effects can the drop in the interest rate produce?
Francisco Echegoyénanalyst at the financial advisory firm Gastón Bengochea, who had anticipated yesterday in dialogue with scope.com that the Central Bank would place the TPM at 11.25%, commented now that this decision restores “hope” that the dollar “will appreciate again if they continue with this rate cut.”
The Economist aldo motto He spoke in the same direction on his social networks and noted that one of the possible effects is “upward pressure on the exchange rate”, as well as “falls in nominal rates, especially short (slightly less inverted curve)” and ” some rise in inflation expectations”.
On Twitter, his colleague jose licandro published in turn: “Unfortunately today the Government has just definitively given up on bequeathing the country a low, stable and credible inflation. A true quality currency”.
Source: Ambito
