The Central Bank of Uruguay (BCU) will continue to aim to maintain inflation in the target range, but recognized some risk in lowering the interest rate by 0.5%. It was the signal that President Lacalle Pou asked for.
In a communication policy that is welcome, the authorities of the Central Bank of Uruguay (BCU) They meet periodically with journalists specialized in economics to discuss the decisions they make, as happened this week after the decision to lower the reference interest rate by half a percentage point, from 9.0% to 8.5%. There it was Ambit.
The Central indicates that the decision was made by the decrease in inflation, because it has remained in the target range for 10 months and due to the gradual decline in expectations. But many analysts doubted that the BCU would lower the rate, while others estimated a more modest decrease, 0.25%. In the hours before, there was a meeting between the president Luis Lacalle Pou and the economic team, including the president of the central Diego Labat. Furthermore, Lacalle Pou himself, in a meeting at the Businessmen’s Club (40th Floor of the WTC), although he supported the monetary authority by pointing out that the dollar “is where it should be”, then – showing off his political waist – he slipped that “some signal was going to be given”, in response to the increasingly severe criticism of the government for the exchange delay.
At this point, it is worth remembering that, although the Central Bank permanently affirms and reaffirms that it does not have a exchange rate target, It is quite obvious that the decisions of monetary politics -particularly on the interest rate- directly or indirectly affect the exchange rate. In fact, in the aforementioned meeting with journalists, the BCU leaders stressed that the exchange rate is one of the means of transmission of monetary policy. Said in Creole, the decline in the dollar helps lower inflation. In this context of exchange controversy, with the reduction in the rate the BCU gave a response that appeases the criticism, although it does not end it.
With this scenario, in the exchange with journalists from the BCU a forceful statement was made: “We must stop thinking that inflation is a random fact: we are committed to keeping it within the target range and we will take the necessary actions to maintain that objective. ”. He gave himself as an example what would be a hypothetical external shock increase in prices in the oil market: “If that happens, the Central Bank will act to avoid the impact on inflation,” they stressed. The BCU estimates that inflation will close the year 2024 at 4.8%.
BCU hierarchs and technicians reiterated that they are focused on lowering the inflation expectations. “Today the country risk of Uruguay is lower than that of Chili; however, Uruguay pays 300 basis points more for its debt in national currency compared to Chile, when we have a similar inflation,” they compared. “This is explained by the difference in expectations, which in Chile are lower than those in Uruguay”, they remarked. It was highlighted that the Central Bank is increasing its credibility, but it is a gradual and gradual path.
In order for the objectives set by the BCU to be realized, the task of deindex the economy. According to its technicians, indexation has been decreasing and the prices of non-tradable services and products are decreasing, but there is still time for this to be consolidated more definitively. “We have taken risks by lowering the rate, we are not radical,” they commented. Likewise, the monetary authorities believe that there is a overestimation of the effect of the interest rate on the exchange market. “The evolution of the dollar It depends on many other things, beyond the local interest rate; particularly from the external context,” they explained.
Another important example emerged at the meeting to explain the change that is being processed at a financial level: the Monetary Regulation Bills (LRM) Today they pay less than titles in dollars. “This is if we take as true the analysts’ projections about the exchange rate at the end of the year,” explained a BCU official. “If these are met, holders of securities in dollars will have a higher remuneration than those who placed in LRM.”
At the BCU they are convinced that -finally- Uruguay is entering a new scenario in its monetary history, consolidating the free exchange rate and lower inflation. “We insist on the free floating as an essential element and that is why the Central Bank does not intervene in the exchange market, although it is not something that is ruled out outright if any problem arises. exceptional setting”, they transmitted.
Source: Ambito
