MercoPress. South Atlantic News Agency

Uruguay admits concern over inflation raises benchmark interest to 7.5%

Economy minister Fernando Lorenzo determined to stem price increases

Uruguay's central bank this week surprised local economists and raised its benchmark interest rate 100 base points, one percentage point to 7.5%, in an attempt to help combat accelerating inflation which is beyond the government's target range.

In the official release the Central bank expresses “concerns about the risk implied by the evolution of inflation, in a context of elevated growth”.

“The central bank's monetary policy committee has watched with concern the trend of inflation in recent months, which has exceeded the target range,” the statement said. “International prices continue rising in a global context of greater volatility and domestic factors are keeping internal prices on an upward trajectory.”

Uruguay’s annual inflation quickened to 7.67% in February from 7.27% in January, above the upper limit of the Central bank's 2011 target range of 4% to 6%. Prices rose 6.93%in 2010, according to the country’s national statistics institute, INE.

Analysts forecast annual inflation of 7.3% in 2011 and 6.7% in 2012, according to the median estimate in a central bank survey of 12 economists, banks, pension administrators and industrial chambers released last week.

Uruguay thus joins countries including Brazil and Chile in raising rates this month to slow inflation and dampen demand. Chile boosted its benchmark rate more than forecast to 4% from 3.5% on March 17. Brazil raised the Selic 50 basis points to 11.75% on March 2.

“It’s an important signal of tightening“ said Pablo Rosselli, an economist at Montevideo-based research company Deloitte Uruguay. ”But while 100 points is a significant rise, additional rate increases will be needed to ease inflation“.

Economy Minister Fernando Lorenzo said the government is determined to stem price increases in the country which has benefited from windfall earnings from commodities and massive inflow of capital looking for higher yields.

”We will seek to implement policies to guarantee that inflation doesn't become a problem,” Lorenzo told journalists in Montevideo early March. In February, the Economy Ministry delayed an increase in gasoline prices, and did the same with milk this month.

Last year Uruguay's 40 billion US dollars economy expanded 8.5%, the central bank reported this week. Unemployment rose to 6.1% in January after tumbling to a record 5.4% in December, INE reported March 11. The Uruguayan Peso also appreciated 11.2% against the US dollar in 2010.