Uruguay's Central Bank of Uruguay this week ordered a 50 basis point increase in the interest rate policy, the eighth straight increase since last August. The move, which brings the monetary policy rate to 9.75%, means the central bank has ordered 525bp of increases in total over the past 11 months. The 50bp hike was somewhat smaller than the four previous hikes, which included April’s 125bp increase and three 75bp hikes.
In its release the Central Bank ratified its commitment to continue with a contractive phase as has been anticipated previously by the Monetary Policy Committee, COPOM.
For its last decision this week COPOM took into account several aspects of the international and domestic situation, much influenced by the region.
Globally instability continues because of the ongoing and expansion of the war in central Europe, difficulties with the supply chain, persistence of high inflation and estimates of lower world growth. In this context the leading central banks have continued with a more contractive monetary policy, than anticipated only a few months ago.
In Uruguay, while inflation and inflationary expectations remain out of the target range, economic activity is recovering and so does domestic demand, tourism industry, international demand and great investment projects as well as an ambitious public works program for the next three years. This has been reflected is economic recovery and prospects of further growth in the quarters ahead.
Given the concern with the rigidity of inflation expectations from the different players but also evidence that monetary policy transmission channels are reacting positively, COPOM decided on the monetary rate increase, as well as anticipating further increases in coming meetings as circumstances evolve.
The Central Bank inflation target is between 3% and 7%, while 24-month expectations have been polled at 6,95%. Inflation in the twelve months to June reached 9,2%.
The Uruguayan economy is estimated to grow 4.8% in 2022 with the creation of 40,000 jobs, and for the first time in decades, if data is confirmed by facts in a volatile global environment, lowering taxes is highly feasible. The Uruguayan central bank data is similar to that of the IMF.
Likewise the ongoing instability in neighboring Argentina has meant that many corporations, have moved their offices to Montevideo, boosting the real estate market and construction industry, as well as becoming home for several thousand high income Argentines.