Uruguay must maintain “a tight monetary stance”, according to the results of the 2023 annual evaluation of the International Monetary Fund (IMF), with the aim of continuing to reduce inflationary pressures in the country’s economy. However, this request clashes with the recent decisions of the Central Bank of Uruguay (BCU) in pursuit of acting on the exchange rate delay, for which the entity faces a decision: control inflation or strengthen competitiveness?
The IMF Executive Board concluded its annual evaluation of the Uruguayan economy and shared the main considerations through a press release. The novelties were not too much —the main points had already been advanced in previous partial evaluations, especially the slowdown that the growth of the Gross Domestic Product (GDP) of the country, which will reach only 2%—, but the praise was well received in terms of continuing to build the confidence of international investors.
However, and beyond the insistence on maintaining fiscal soundness and controlling the level of debt that the country has —already warned by the international organization—, one point may cause concern in the government: the request for maintain a tight monetary policy to control inflation. That is, sustain the contractive policy that characterized the actions of the BCU regarding interest rates during 2022 and early 2023, also highlighted by the IMF.
This, at first glance, does not seem to be a negative in itself. But if it is located in the particular Uruguayan situation, it fully meets the demand of the industrial and exporting sectors, which ask for the lowering of the rates to, thus, try to strengthen a dollar that has not been able to rebound and that is dragging down competitiveness of the country in the foreign market.
Likewise, the executive board of the Fund indicated that foreign exchange interventions should only be limited to responding to disorderly market conditions. Something different from what he did Monetary Policy Committee (Copom) in April, when he decided to lower the Monetary Policy Rate (MPR) to try to recover the value of the dollar, leaving aside the attempts to adjust inflation to the target range.
Goodbye to the search for exchange balance?
The IMF’s suggestion seems to put an end to the little spring of the export sector which, ultimately, was not such either. The truth is that the drop in rates slightly boosted the value of the US currency, but the improvements in Uruguay’s credit rating —first by Standard & Poor’s and then, still too recent to assess its real impact, for Moody’s— They relativized this appreciation due to the strengthening of the peso that tended towards the stability of the pair.
However, the international organization seems to limit the future actions of the BCU in terms of monetary policy, after having projected a drop in the interest rate to 8% by the end of 2024. This, at least, until price pressures and inflationary expectations converge in the target ranges. That is, until inflation drops below 6%.
If you look at the last Monetary Policy Report (IPoM) of the BCU, this should happen throughout 2024, particularly in the second quarter. Although the financial markets consider that in 2025 inflation will continue to be closer to 8% —with an expectation of the interannual index at 7.83%, according to the report “Assessment of prices and inflation expected by agents” from the same Central Bank.
Anyway, The short-term scenario does not present such a marked dichotomy either. between contractionary rate policy and the strengthening of the dollar: the projections of analysts consulted by the BCU regarding the appreciation of the US currency warn of a price of 41 pesos in December, which means an annual increase of 4.9% —well below inflation and in clear real decline—; while the country’s monetary authority decided to keep the TPM frozen at 11.25% for the next month, so the drop does not seem to be, yet, the priority given any type of growth in inflationary expectations.
Therefore, it will remain to be seen how both indicators evolve —inflation and the dollar—, and what decision the BCU will make based on what is suggested by the IMF.
Source: Ambito
