He Central Bank of Uruguay (BCU) published the new Monetary Policy Report (IPoM) corresponding to the first quarter of 2023, and surprised, above all, with its inflation projections for the next few years: from the 8.3% that was registered at the end of 2022, expect a price increase of around 7% in December of this year and an evolution towards 5.3% at the beginning of 2025. Although they are positive data, the This dilemma arises due to the great difference that exists between this forecast and market expectations.
Both data were published by the BCU. However, the difference between one and the other is more than 15 days between their disclosure dates: also there are between 2 and 3 points of distance between the projections.
Thus, according to the BCU Monetary Policy Report, inflation expectations they were corrected upwards for this year —mostly due to the effects of drought—, but they were adjusted downward from 2024. In this way, while 2023 is expected to close with an inflation rate of around 7%, to reach figures just below 6% in the second quarter of 2024 and, finally, a 5.3% year-on-year in March 2025.
What do the financial markets expect?
The updated figures of the BCU contrast visibly with the projections of the agents of the financial system Uruguayan —based, in turn, on the implicit expectations of the financial markets in the yield differential of nominal and index-linked securities—which, from the outset, they corrected upwards.
The data collected in the BCU newsletter entitled “Evolution of prices and inflation expected by agents” realize that the markets expect an escalation of inflation which will reach 9.05% year-on-year during the second quarter of 2024 —historic inflation levels for the country, similar to the worst economic moment during the Covid-19 pandemic. Then, with a marked decrease but that remains in high figures, March 2025 would register an interannual inflation rate of around 7.83%.
The difference between one and the other report is evident: for the second quarter of 2024, the gap is 3 points; while for 2025 it is approximately 2.5 points.
This wide disagreement between the projections, for the BCU will be because “inflation expectations would adjust progressively downwards, in turn influencing nominal wages, which would generate lower inflationary pressures in the monetary policy horizon with respect to those expected in the previous report. Likewise, the slowdown in inflation would also be determined by other macroeconomic factors, such as the persistence of a gap in the Real Exchange Rate and to a lesser extent of a GDP gap in negative territory”.
And despite the fact that both data were published by the country’s central monetary authority, the IPoM is considered one of the more reliable macroeconomic reportswhile the expectations of financial agents are no longer the result of a survey.
In addition, it should be remembered that the Minister of Economy and Finance (MEF), Azucena Arbelecherecently referred to the increase in inflation at a lunch organized by the Association of Marketing Managers (ADM). There —now, it seems that in a non-innocent way— he commented that his wish would be for businessmen’s expectations to be lower because they impact prices. “What is expected, is transferred to prices”he pointed out, realizing the relevance of expectations in macroeconomic indices.
In this context, the difference between the projections recently disclosed in the IPoM by the BCU take another nuance, which seems to draw another possible scenario after a more pessimistic future expected by the markets.