The decline of the inflation has been a key objective for the economic team during this government. The mission is up to the Central Bank (BCU)which yesterday decided to maintain the rate at 8.5% Monetary Policy Rate (MPR)to “consolidate the decline in inflation and expectations, at 4.5% annually,” according to the statement.
The Central is succeeding in its objective, and this is not only due to the direct result in the retail inflation. In fact, this has remained within the target range (3 to 6%) for 13 consecutive months and future expectations have also been falling. The businessmen consulted by the INE They project inflation of 6% for next year (median), touching the target range (ceiling) for the first time.
There is also an additional achievement: economic leaders from across the political spectrum have supported this objective and expressed their commitment to maintaining it. This is valuable in view of the electoral cycle and the next government, regardless of the political party. The fact is that the drop in inflation has had its costs, so it would be important to keep it low, so that the effort has not been in vain.
He monetary combat inflation is the responsibility of the BCU, but its effects are felt far beyond its area of influence. Maintaining a real rate high (today, 3.5 points above inflation, 2 points above expectations) has a negative effect on the activity; There is no magic in economics. This does not mean ignoring the profound positive effects of lowering inflation in the medium and long term, and that is why it is an absolutely compatible objective. But the film must be seen in its entirety.
In this plane Uruguay It has some peculiarities, because being a bimonetary economy the negative effect of the restrictive monetary policy It is not so direct (the monetary base is small and the credit channel is still modest), but it operates largely by delaying the exchange rateThis can vary in magnitude depending on the circumstances (today it is estimated between 10 and 15%) and monetary policy is not the only cause; but it does have an impact.
In other words, a contractionary monetary policy in a bimonetary economy has particular effects, even when it is well founded. A lagging exchange rate can motivate – in the short term – some “mirages”: greater consumption capacity of imports, expansion of some service sectors, lower weight of dollar debts. But in the long run, it ends up taking its toll on the activity and the employment, which increased over the last year but has stabilized in recent months.
For these reasons, it is important that the Central Bank has better company from the rest of the economic policy, to shore up low inflation. Since the fiscal front, There is little help: the deficit rises (it is at 4.4% of GDP) and the government itself has recognized that a couple of pillars of the current fiscal rule will be breached. Since the Salary policy, the objective of resuming and even surpassing the levels of real wage pre-pandemic has involved indexed adjustments above the CPI, generating a complicated inertia of costs and prices. Finally, the trade and market opening (of goods and services) has not made much progress (fuel transportation was an eloquent example of how difficult the task is when certain interests and the status quo clash).
To reaffirm the virtues of low inflation, it is imperative to improve in these areas: reduce the deficit, de-index wages and promote productivity, and open markets further. Otherwise, the effects of the exchange rate lag will become more acute, sooner or later.
The risk is exacerbated by the situation in Argentina, where the parallel exchange rate jumped, bringing relative prices with the neighboring country back to last year’s levels, threatening to repeat the “exodus” of consumption to the other side of the river, like the one we had in 2023. Luckily, this week the neighboring government decided to intervene in financial dollars (close to the parallel) and the price gap narrowed, but uncertainty persists. Uruguay It has to stick to its objectives; “following” Argentina’s ups and downs would be foolish, but so would ignoring them.
It also happens that a part of the most dynamic sectors of the economy enjoy tax exemptions or other benefits, in varying magnitude, that allow them to reduce or mitigate the negative effects of the exchange rate lag (loss of competitiveness). In turn (in macroeconomics everything is linked) this resignation is part of the explanation (not all) of the deficit.
Another part is a consequence of the commitment to recover and increase real wages compared to pre-pandemic levels, which has effectively been fulfilled. But with this, the inertial increase in State expenditurewhose main components are salaries and pensions. The salary policy was not entirely in tune with the monetary policy and adjusting this will be key in the next government. If inflation is to be kept low, the Central Bank must be better supported by salary policy, fiscal policy and a more forceful market opening policy, both in goods and particularly in services.
Source: Ambito
