MercoPress. South Atlantic News Agency

Uruguay leaves basic rate unchanged at 8%; inflation remains above target

Central bank president Mario Bergara

Uruguay’s Central bank kept its benchmark interest rate unchanged as policymakers focus on bringing inflation back to target in anticipation of possible impacts from a global slowdown.

The five-member policy committee, led by central bank Governor Mario Bergara, kept on Thursday the bank’s overnight rate at a two-year high of 8% as was anticipated by analysts.

Two rate increases in 2011 have pushed borrowing costs up 150 basis points, the second-biggest increase among Latin American central bank’s this year after Banco Central de Chile, and have helped to slow annual inflation from 8.61% in June to 7.57% last month, according to the central bank.

Nevertheless prices are expected to rise 7% in 2011 and 2012, above the upper limit of the bank’s target range of 4% to 6%.

After GDP rose 6.6% in the first quarter from a year earlier, Uruguay’s economy cooled to post 4.8% year-on-year growth in the second quarter, the slowest pace since the October-through-December period of 2009.

However Economy Minister Fernando Lorenzo repeated on Thursday during an investors and risk forum that the government expects the economy will expand 6% this year.

Among the vulnerabilities of Uruguay’s economy are its small size, which magnifies the impact of any shock such as a drought, and still high levels of dollarized debt plus its two neighbors performance if recent history is any indication.

The unexpected Brazilian decision in January 1999 to devalue its currency which surprised Mercosur partners in spite of promises to the contrary and the collapse of the Argentine economy in 2001/02 which dragged the Uruguayan banking system highly exposed to Argentine depositors.

“The crisis is a stress test for every country´´ said Mauro Leos, an analyst at Moody’s Investors Service, in an interview Thursday in Montevideo. “It’s probably going to be ugly and worse than we imagine now.´´

Regarding inflation Minister Lorenzo said the rate which was 7.57% in August, will continue falling until the end of the year. “We have to act with caution because inflation is still a point and a half above the upper limit of the target range” admitted Lorenzo.