MercoPress. South Atlantic News Agency

Uruguay admits to IMF concern over inflation, but rejects capital flow controls

President Mujica described inflation as a ‘curse’

Uruguay’s concern with inflation risks and instruments to ‘mitigate’ its impact was underlined by the region’s representative at the IMF Monetary and Financial Committee meeting in Washington where the IMF and World Bank are holding their spring meetings.

“Challenges to the Uruguayan economy continue to be considerable, particularly in the current world economic situation which is generating a high dose of uncertainty and specifically a significant increase in inflationary pressures”.

The statement on the Uruguayan chapter was done by Chile’s central bank president Jose De Gregorio, the country that holds the ‘chair’ of the committee shared by Argentina, Bolivia, Paraguay, Peru and Uruguay. Each country chapter is prepared by each of the delegations.

In the report Uruguayan authorities mention that to combat inflationary pressures last March 23, the Monetary Policy Rate was increased above market expectations from 6.5% to 7.5% and the Economy ministry has reiterated its commitment to accompany those efforts in the “fiscal field”.

The Uruguayan chapter also strongly supports “a flexible exchange rate as the most appropriate to absorb external shocks in a small open economy as Uruguay’s, limiting its foreign exchange interventions to help soften volatility”.

Exchange rate flexibility and measures to prevent the rapid appreciation of local currencies against the US dollar was intensely debated over the weekend in the IMF meeting.

This was particularly emphasized by Brazil’s Finance minister Guido Mantega reacting to developed countries request to the IMF for closer monitoring of capital controls that are being implemented to prevent the appreciation of local currencies.

“Ironically some of the countries responsible for the worst crisis since the Great Depression and that still must solve their domestic problems, are impatient when it comes to dictating codes of conducts to the rest of the world”, said Mantega.

The Brazilian minister said that countries such as Brazil and Colombia “can’t support for any longer the over appreciation of their exchange rates” and defended the implementation of capital control measures.

However De Gregorio speaking for Chile, Argentina, Bolivia, Paraguay, Peru and Uruguay said they are ‘sceptical that capital vigilance principles could be useful currently’, adding that “history has proved that financial integration has advanced in spite of short term turbulences, without specific guides or a structured multilateral process”.

Last week Uruguayan president Jose Mujica talked about the issue in his daily broadcast describing inflation as a ‘curse’ with no ‘magic solutions, but with tools’ to combat it, although it won’t have a neutral impact and people can suffer.

Inflation in the last twelve months to March reached 8.17%, while a poll from the Central bank shows that most analysts believe 2011 inflation will average 7.51%, which is above the bank’s target.

However he also pointed out that the most serious problem comes from the “falling tendency of the US dollar, which from the Brazilian side threatens us daily”.

Vice-President Danilo Astori referred to the issue saying Uruguayan authorities are working to make compatible two policies: combating inflation and “avoiding off-alignments with the exchange rate”.

He added that “no significant effect in a near future” can be expected regarding Brazil’s foreign exchange policy.