MercoPress. South Atlantic News Agency

Uruguay central bank admits inflation remains the main concern and pledges monetary contraction

The Central bank said it has an 8% monetary supply convergence target in the near future

Uruguay's Central bank confirmed that inflation remains the leading challenge and ratified the current monetary contractive policy with the M1 money supply index converging to 8% from its current 10.4%, in a 'not too distant horizon'.

 M1 measures the money supply that includes all physical money in the hands of the public, (coins and currency), as well as demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts. In other words M1 measures the most liquid components of the money supply, as it contains cash and assets that can quickly be converted to currency.

It does not contain “near money” or “near, near money” as M2 and M3 do.

On Thursday the bank's Monetary Policy Committee held its regular quarterly meeting and insisted that the long term target for inflation remains at 3% to 7%, (currently the inflation index is running close to 10%, as has been doing for the last two years).

“Monetary policy has kept its contractive emphasis and according to preliminary data, M1 taken as reference of the monetary policy aggregate, is estimated to have expanded 10.4%, on an annual basis in the second quarter, which is in the Copom 10/13% April target range”, reads the release from the Central bank.

On this background Copom has decided “to ratify its contractive policy and established for the July-September quarter, an indicative growth reference for M1 of 9% to 12% on an annual basis”.

“This reference implies continuing in a convergence path to 8% in a not too distant horizon, a rate which is consistent with the inflation target and growth potential”, adds the release.

To justify this policy Copom gives a bird's eye view of the global economy and the slowing down of regional countries with which Uruguay mostly trades.

The US continues to reverse its monetary aggregates expansion; the Euro zone and Japan are still moving in an area of uncertainty while China (main trade partner of Latam, commodities supplier) remains in a path of moderate growth, points out the Copom.

However the Uruguayan economy, although suffering a lesser expansive performance, has growth rates above the region's average and in this context there is evidence “of a convergence of the growth rate to GDP potential”.

But, says Copom, in this context inflationary pressures persist ”while effective inflation as well as market expectations are above the target range (3% to 7%) which means inflation continues as the central issue of economic policy concerns.

The Uruguayan government in its presentation to Parliament has also reduced the GDP growth estimate this year from 4% to 3%, with a possible surge to 3.3% in 2015.

However the government also admits, but not a word is mentioned in the Copom report, that the budget deficit has climbed to 3.3% of GDP, which is the highest Uruguay has experienced since the 2002 banking crisis, when the Uruguayan economy was saved from melting with a bridge-loan from the George Bush administration.

This admitted deficit is the pinnacle of a growing fiscal distraction tendency which started sometime in 2006/2007 and has steadily advanced despite the fact the Uruguayan economy has been on a sustained growth path since 2003.