Uruguay’s strategy to gradually raise interest rates over the rest of the year should be enough to contain inflation near 10% without causing a sharp economic slowdown, according to the president of the Central Bank of Uruguay (BCU), Diego Labat.
Labat said the bank’s return to an inflation-targeting regime set in 2020 remains a “work in progress” that deserves a cautious approach, as it is unclear how inflation expectations would react to faster tightening.
“We understand that an overreaction by us also does not generate immediate results as it might elsewhere,” Labat said in an interview on Monday. “We prefer stable growth for a longer period”, reducing the risk of “stress” in the economy.
Uruguay’s approach contrasts with neighboring Brazil, which aggressively tightened monetary policy in response to rising consumer prices but has left rates unchanged since August.
The BCU signaled this month that it would raise its benchmark rate by half a percentage point at each of the next two meetings, to 11.75% in December and ten increases from August 2021.
Labat declined to comment on whether the bank will continue to raise its borrowing costs next year. He added that he expects inflation to fall to his 3% to 6% target before President Luis Lacalle Pou ends his term in early 2025.
Consumer price increases will take longer than expected to decrease due to the pandemic and the Russian occupation of Ukraine, Labat said.
The central bank expects inflation to fall from 9.95% last month to around 9.5% in December.
External INFLATION
Uruguay has long had higher inflation than its regional counterparts. The weight of unions and a highly regulated labor market means that wages tend to match or exceed inflation, while trade contracts are structured to protect the parties from price changes.
According to forecasts by the International Monetary Fund, the economy will expand by 5.3% this year, slowing to 3.6% in 2023.
Rising interest rates, a stable economy and high commodity prices have helped the Uruguayan peso strengthen 8.5% this year, making it the best-performing currency in the Americas.
“Today’s exchange rate is the best reflection of all the information available in the market,” Labat said when asked if the currency is overvalued.
With information from Bloomberg
