After the decision to cut 50 basis points the Monetary Policy Rate (dwt), the Central Bank of Uruguay (BCU) disseminated the Principal reasons by which they determined the significant reduction, which included the global and national context of low inflation, but also the improvement of some economic indicators in the country.
Among the considerations of the situation in Uruguay, the BCU published a report in which it took into account “the new reductions in inflation expectations expected based on the observed data and the contractive instance of monetary policy”. while stressing that “the reduction in inflation comes at an opportune moment for reduce inflationary inertia in salary negotiations”, although he nevertheless admitted that “they continue to be a risk to inflation forecasts”.
In any case, after setting the interest rate at 10.75%, from the Board of Directors of the Central Bank stated that “the future moves they will be conditioned by the evolution of inflation and its expectations in the 24-month horizon”.
It is worth noting that the decision was adopted unanimously, although the director Ignacio Berti considered that the reduction “must be older” In turn, he reiterated his “concern for the exchange rate misalignment, whose correction it deems necessary.
The analysis of the Uruguayan economy
Regarding the economy in Uruguay, they valued the increase of 0.9% of GDP in seasonally adjusted terms and 1.2% year-on-year, despite projections of contraction in the second quarter due to the supply shock of production as a result of drought and a slight recovery in the third quarter of 2023.
With respect to exchange rate, highlighted that, in the June average, the peso appreciated 1.7% (1.5% average in the quarter), behavior that was observed in other currencies in the region, while the global dollar index weakened.
At the same time, they assessed that both employment and the activity rate presented increases compared to the previous quarter and are located at values higher than those observed before the pandemic, to the point that between April and May the employment rate was located for the total of the country in 57.7% on average, nine tenths above the record of a year ago, while the unemployment rate increased up to 8.7%
Another determining factor was the inflation, which was within the target range in the year ended June. In this regard, they argued that “headline inflation (5.98%) and core inflation (5.2%) They are at levels that have not been observed since 2017 and 2009 respectively”. Along the same lines, they assessed that both inflation indicators accentuate the slowdown that has been taking place since October of last year.
They also highlighted that, in June, the average of the three indicators of inflation expectations for the 24-month monetary policy horizon (HPM), it stood at 7.09%, below the previous quarter (7.23%).
The look on international factors
In evaluating other factors, the BCU recognized the decline in inflation around the world, as well as “signs of slowdown” in the main economies, mainly China. At the same time, he was optimistic that the Federal Reserve (FED) of the United States maintain the interest rate, after two additional increases.
Regarding the region, they indicated that in Argentina growth prospects were revised downwards with lower exports and a drop in revenue, which “maintains the risk of a devaluation with a rise in inflation. At the same time, they pointed out that Brazil has been growing upwards and may start a down cycle of the interest rate.
Source: Ambito
