He Monetary Policy Committee (Copom) He has his last meeting of the year today, and in it he will decide what will happen to the reference interest ratesin Uruguay for the beginning of 2024, closing a year marked by a less contractionary path than the one it had been following since cutout of the rates.
April was the month that opened the door not only to the decline in Monetary Policy Rate (MPR) in Uruguay, but also to the progressive reduction of rates by most of the central banks of South America.
There were only 25 low points that reduced the interest on placements in pesos from 11.5% to 11.25%, but the Central Bank of Uruguay (BCU) was the first in the region to take this measure—even against the direction of the United States Federal Reserve (Fed)—, in the midst of a context in which the indices of inflation were beginning to reflect the positive result of the monetary politics.
In addition to the relative success in price controlin the local field this first cut found arguments in the effects of the drought history that the country was going through, which considerably affected a sector of economic importance for the country and that had already been suffering from the loss of competitiveness due to the exchange delay: the agro-export sector.
In that sense, the first drop in the MPR aimed to improve the exchange rate.
How were interest rates during the year?
During 2023 —and prior to the last meeting of the year, for which a new cut of 25 basis points is expected or, failing that, the current percentage will remain unchanged—, the BCU lowered the MPR by 225 bp in different stages. Thus, the interest rates reference went from 11.5% at which they had been frozen for several months and the entire first quarter; to the current 9.25% with which the year may end.
The first cut occurred in April, but there was a quick pause in May, after Copom decided to maintain the high interest levels for placements and investments in pesos a little longer. He reduction cycle more steadily began in July, with the first drop of 0.5%, which placed the MPR at 10.75% after June inflation was placed within the target range established by the government.
In August, the sharpest drop to date was defined, of 75 basis points, which left interest rates at 10%, accompanying the significant decrease in pressure on prices in the country. The decision at Copom was unanimous and the markets expected a similar decision in October before the good macroeconomic data —and the need to encourage a rise in the dollar—; Finally, it was determined that the cut was another 50 bp.
The last drop – so far – was 25 bp in mid-November, amid the first speculations that the cuts will begin to become less and less, despite the fact that the BCU had projected an MPR of around 8% in 2024. Meanwhile, analysts estimate that Copom will decide on a cut of the same characteristics during its meeting today.
End of an equally contractionary cycle?
The cycle of withdrawals initiated by the BCU was a policy celebrated even by large financial agencies such as Moody’s Analyticsmainly because this was a consequence of the good results in terms of inflation control.
Beyond this, the consulting firm Exante points out that monetary policy decisions are still moving in contractionary territory. This is because the nominal natural rate—that is, the real natural rate together with inflation expectations—is at 8.7%, while the MPR will not drop below 9% at the end of 2023.
If current inflation levels are considered – no higher than 6% in the worst of the projected scenarios – the gain in pesos from interest remains significant, so there would still be room for further cuts during 2024, despite that the same president of the BCU, Diego Labat, announced that the end of the downturn cycle will be sooner rather than later.
Source: Ambito
