He Central Bank of Uruguay (BCU) has an eye on the United States Federal Reserve (Fed) and the increasingly close possibility that the world’s largest economy will enter a recession. Faced with this scenario that would have an impact at the local level, the authorities decided to once again raise the countercyclical capital buffer necessary to cope with the eventual crisis, which will be 0.75% higher from 2024.
Within hours of the Fed publishing the minutes of its last meeting of the Federal Open Market Committee (FOMC) —which was carried out three weeks ago—, the expectations indicate that the need for further interest rate hikes for the remainder of the year, despite the announcement of a pause in the restrictive monetary policy and the fact that it was applied only once.
The reason is simple and complex at the same time: the fight against inflation is not having the expected results in the North American country, and it is increasingly less likely that they manage to channel the indicators within the target range. Therefore, the path of rate increases will continue to be the one chosen by the Fed during 2023.
This is what the BCU also providesand one of the reasons why last week it decided to raise the countercyclical capital buffer.
An economy in recession and the impact on Uruguay
“Inflation projections PCE (Personal Consumption Expenditures) core in the United States they have been below effective core PCE inflation, and this has remained persistently high around 6%. The increase in interest rates from 0% to 5.25% that the Fed made in about a year have not achieved a drop in the core of inflation”, stated the BCU in its Report on the Countercyclical Capital Buffer in Uruguay.
“Additionally, the Fed has announced the possibility of two additional increases in the monetary policy interest rate in the remainder of 2023”, added the country’s monetary authority, giving an account of the attention paid to this issue. It is that, as he later pointed out in the report, the scenario also makes a recession likely in that country, with effects on the credit market and financial markets and, consequently, on the economic cycle of both developed and emerging countries.
Therefore, also in the local economy: “This external context is relevant for Uruguay due to the risks involved for the local financial system and for its impact on the real business cycle”.
With this premise, the BCU once again raised the countercyclical capital buffer after the increase announced in January, leading to the 0.50% increase defined at the beginning of the year. for 2024 to 0.75% —25 basis points more.
In short, because the increase in market and credit risks in the financial markets generated by the possible recession in the United States is amplified in an economy with a partially dollarized credit marketas is Uruguay — where credit in dollars has shown an upward trend since the beginning of 2020, and in March 2023 it reached 9.248 million dollarsan amount 18.7% higher than a year ago.
Source: Ambito
