MercoPress. South Atlantic News Agency

To contain inflation Uruguay raises benchmark rate 50 points to 8%

Central bank president Mario Bergara: rising prices, ‘our main concern in the balance of risks’

As anticipated, Uruguay's central bank raised its benchmark lending rate 50 basis points to 8% on Thursday in an effort to keep inflation within its target range. Uruguay’s consumer price index rose 8.53% in the 12 months through May, far above the official target range of between 4% and 6% set for the 12 months ending June 2012.

“This decision was necessary to promote the convergence of inflation and expectations toward the target range, a process that will contribute to giving more solid fundamentals to the growth and competitiveness of the Uruguayan economy” the central bank said in a statement.

The government of President Jose Mujica has expressed concern about quickening inflation, which in March prompted the monetary authority to hike the key rate by 100 basis points to 7.5%.

Earlier in the week Deputy Economy minister Andres Masoller said there was concern in the government because private consumption is expanding at a higher rate than GDP and in the first quarter jumped 9.3% compared to the same period a year before.

Central bank chief Mario Bergara said last week the monetary authority would “try to give clear signals in terms of using monetary policy to combat inflation”. He described rising prices “the main concern in the balance of risks”.

Some analysts questioned the impact of the rate increase and said more dramatic steps may be needed to tame inflation.

“If the government's not going to do anything in terms of limiting public spending, the only option left is to raise rates to fight inflation” said Maria Dolores Benavente, economic adviser to the Chamber of Commerce and Services (CNCS).

Economist Pablo Moya from the Oikos consulting firm said the increase was “appropriate and correct”, signalling further measures to tame prices. “I wouldn't rule out further increase to rates and deposit requirements in the coming months,” he said.

The central bank raised deposit requirements on June 1 for the first time since 2007.

The central bank said in its statement that it expects the economy to continue to show high levels of growth and capacity utilization. The economy expanded 6.8% on the year in the first quarter, having grown 8.5% in 2010.

The central bank said in the statement that it expects the economy to continue to show high levels of growth and capacity utilization.

Deputy Minister Masoller admitted signs of “macroeconomic misbalances in the medium term” but insisted authorities were confident that with strict fiscal and monetary policies “inflationary pressures can be contained”.

Uruguay is benefiting from high prices for its agriculture exports and good economic times in neighboring Brazil and Argentina.