Uruguay fearing inflation drastically rises basic rate 75 points to 8.75%

Friday, December 30th 2011 - 21:22 UTC

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Inflation has been above the target range for 23 consecutive months

Uruguay’s central bank unexpectedly increased on Friday its benchmark interest rate by 75 points from 8% to 8.75%o as policy makers admit inflation, and mid term expectations remain notoriously over the target range and price stability is the main concern in “the current socio-economic context”.

Inflation accelerated to 8.4% in November from 7.9% the month before, above the upper limit of the central bank’s 4% to 6% target range for the 23rd month. Europe’s debt crisis has yet to affect the 44 billion dollars Uruguayan economy, which expanded 7.5% in the third quarter from the same period last year, the bank reported Dec. 20.

Inflation will slow to 7% next year from 8.2% in 2011, according to the median estimate in a central bank survey of eleven economists, banks, pension administrators and industrial chambers released Dec. 14.

In its assessment of the international situation the bank said that uncertainty and volatility in developed countries remain with growth difficulties plus financial and fiscal problems, particularly in Europe.

However in spite of this framework Uruguay has been able to better profile its liabilities by cutting the US dollar component of its debt with a flatter long term maturing of payments. Furthermore a slowdown in emerging countries activities so far seems not to have influenced the international prices of Uruguay’s main (commodities) exports.

In the domestic context, Uruguay keeps growing at significant rates with a very high utilization of production resources. Exports, productive investment and domestic consumption keep fuelling the process.

“And in this framework, together with the fiscal and financial data, inflation must be repositioned as the main concern in the balance of risks for the Uruguayan economy and even in the case the international context impacts negatively on domestic production trends, we must face this eventuality with lower inflation figures,” the bank said in its report accompanying the decision.

“The priority attention demanded by current price stability is consistent with the need to give continuity to a harmonic development of production, competitiveness and the improvement of social indicators; prudence and responsibility continue to be the axis of the decision-making process so as to send the correct signals to influence the economic process and agents expectations”.

The five-member Policy Committee, led by bank President Mario Bergara will next meet in March.