Uruguay central bank “less confident” in ability to bring down inflation to target

Wednesday, June 12th 2013 - 07:34 UTC

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Capital Economics says “ambiguity surrounds inflation targeting” implemented by Central bank president Bergara

Uruguay’s changes in the monetary policy regime as announced last week are unlikely to address the country’s inflation problems points out Capital Economics in its latest report emphasizing that a tighter economy policy and reduction of wage indexation remain the main challenges to keep within the 5% target.

Last Friday Central bank president Mario Bergara outlined plans to move away from the use of the rate policy and instead exert control over a broad array of monetary aggregates, thus returning to the monetarist approach that was prevalent until 2007.

Capital Economics says that inflation has fallen back a little to 8% in recent month but is still a long way above the 4 to 6% target and is currently “the highest among the major inflation-targeting economies in Latin America”.

However the shift to the aggregates does not necessarily anticipate success even when the previous experience helped bring down inflation from a peak of nearly 30% in the aftermath of the 2002 neighbouring Argentine crisis to 4% by 2005.

In effect inflation again took off and reached 9% by the time the Central bank had shifted to the rate policy in 2007.

The consultants estimate Uruguay inflation to be above 8% this year and 7.5% in 2014.

Concluding Capital Economics suspects that “the latest measures will only add to the ambiguity surrounding inflation targeting in Uruguay”, since the changes are not due to take effect until mid-2014.

Likewise the fact that the official tolerance band is set to be widened again to 3-7% suggests that “the central bank BCU is becoming less confident in its ability to bring inflation back to target”.

Finally and as in previous Capital Economics reports, to bring down inflation Uruguay needs to tighten the pace of growth of public spending and reforms to contain widespread wage indexation.

Categories: Economy, Politics, Uruguay.

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Anglotino
Is Stevie caught up in the floods?
Jun 12th, 2013 - 09:03 am 0
ChrisR
This Central Bank president is way out of his league and is approaching his sell by date, but it won't happen unless they can find somebody, anybody, to pick up the poisoned chalice that is Uruguayo government 'finance policy'.

TWO finance cartels are operating within government and Pepe has admitted he does not know how to handle it and he's ONLY the president FFS!

I really love this country but I am at my wits end with these childish antics all the while. I feel like getting them all in a room and knocking their heads together in a forlorn hope of getting some sense into the situation.
Jun 12th, 2013 - 06:22 pm 0
Black Dynamite
Looks like the economic stability of Uruguay is already struggling, and the dollar hasn't even collapsed yet! Words you don't want to hear are “Central bank”. That's a bad sign of things to come, since every “Central Bank” is corrupt.

The word on the street in the US is to find a safe haven, a fall-back position, WHEN the US dollar goes down. Chile and Uruguay are often mentioned as desirable safe havens.

But they seem heavily dependent on Argentina, and Argentina is very unstable politically and economically, and all the countries use fiat currency, which will suffer badly WHEN the US Dollar collapses.

If inflation is 8% now, imagine what will happen when hyperinflation hits after D-Day? This is supposed to be the easy part. The currency shouldn't be struggling right now.

Very bad omen. If anybody knows of a civilized nation that doesn't use fiat debt-based currency let me know!
BD
Jun 17th, 2013 - 02:57 pm 0

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