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After the surprise cut, the BCU analyzes future drops in the interest rate

After the surprise cut, the BCU analyzes future drops in the interest rate

For the Central Bank authorities, the Monetary Policy Rate is at a good level, but there is still room for further cuts.

Photo: BCU

The decision of Central Bank of Uruguay (BCU) to cut by 50 basis points the reference interest rates after the last meeting of the Monetary Policy Committee (Copom) It was a surprise received with a certain optimism in the country’s export and productive markets and sectors; and opens a new path of possibilities that did not seem like such after the announcement that 2024 would be marked, at least during the first half, by the pause in the bearish cycle that characterized the previous year.

Although the possibility that the Monetary Policy Rate (MPR) remained below 9% after the second Copom meeting of the year began to be considered in the previous week, the truth is that the markets They did not expect a cut greater than 0.25%, nothing more than a “signal” for the exporting sectors, whose discomfort due to the exchange delay continued to increase. The 0.5% drop was a novelty, which responded mainly to the opportunity opened by results of “better quality” in inflationary terms.

Considering that, in March, economic agents expected that the first cut of 2024 would occur only in August – with the BCU concentrated on consolidating inflation within a lower level of the target range—and that not only happened four months earlier, but a greater proportion than projected, questions arise as to whether, in fact, the monetary authority will continue the downward cycle or whether it will resume the brief pause in this regard.

What does the Central Bank think?

The decision to lower the MPR more sharply than expected responded to the fact that the BCU noticed that the monetary politics is giving “better quality” results, especially after Consumer Price Index (CPI) will register a variation of 3.8% in March and will be located within the target range for the tenth consecutive month.

According to the monetary authorities, the letter yield curve It moves in the same way as interest rates, just as bank rates do, so the behavior of the market is in accordance with the Central Bank’s measures and will continue along those lines.

Interest rates are today at a “neutral level”, but with the imminent possibility of reaching a level that ends the contractive cycle of monetary policy. Anyway, the BCU understands that, for the moment, the level is appropriate, and that is where it will be maintained, as long as the variables accompany the decision.

However, there is still room for the MPR to drop further, to 8%. That is the scenario that the Central Bank contemplates.

Source: Ambito

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