The “signal” of the BCU in the face of inflation and the “change of vision” for the second semester

Montevideo — The Central Bank of Uruguay (BCU) tightened its monetary policy by raising the interest rate this Thursday by 125 basis points to 8.5%, higher than expected, and when the previous rises had been 75 basis points. The increase seeks to show a reaction of the regulator to a growing inflation that in recent months increased its distance over the target range that from September will be between 3% and 6%.

The president of the BCU, Diego Labat, held a press conference this Thursday, where noted that the resolution adopted after the meeting of the Monetary Policy Committee it was “a signal” of “monetary policy acting” in search of anchoring expectations. “Faced with the inflationary phenomenon, it was important to give a signal above what we expected on previous occasions,” he said. “It is a process that requires perseverance. We must continue on the path of aligning inflation expectations and that is our main objective,” Labat added in another passage.

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The Consumer Price Index stood at 9.38% in the 12 months ending in March, according to data released Tuesday by the National Institute of Statistics. Two days later, after the Copom meeting, Labat highlighted the institution’s reaction. “Given this scenario, we understood that the monetary policy signal had to be reinforced and it was necessary to give this signal of a rise of 125 basic points,” he insisted.

Labat said that both in the Copom meeting in May and in the following will continue the “path of increases”although he did not go into details about what level is expected in the face of “a degree of high international uncertainty”.

The president of the BCU included in his analysis the conflict between Russia and Ukraine, as a factor that led to an acceleration of prices transferred to the local level. In addition, he pointed out, that changed what was expected for the rest of the year. “In the previous Copom we anticipated a second semester where prices were already beginning to slow down. There is a change of vision. That which seemed clear to us is no longer going to be so simple and we cannot confirm it for the second semester”, said the president of the BCU.

But in this context, the government also faces pressure from the salary side. As he had pointed out on March 30 during an interview with Bloomberg Line, the Minister of Labor Pablo Mieres reiterated this Wednesday that the escalation of inflation could compromise the salary recovery promised by the Executive Branch.

“The issue is to see what we do to prevent it from being postponed. Because the risk that we have today is that with the existing levels of inflation, that goal that we had to begin to recover the salary within the course of this year begins to be between question marks, ”he said at a press conference. The real salary of Uruguayans fell 1.5% in 2021.

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The new increase in interest rates in Uruguay took place in a local and international inflationary context, for in which the government has already resolved the 10% VAT exemption for products such as strip roast, common white bread, campaign cookies, noodles and pasta. But it also made price agreements with the meat sector to avoid increases in other cuts and also with poultry producers for eggs.

In the latest BCU Inflation Expectations survey, Analysts revised their estimate for the end of the year upwards and placed it at 7.9%. In the month of February it had been 7.1%. Meanwhile, businessmen expect inflation of 8% by the end of the year, according to a survey released this Thursday by the National Institute of Statistics.

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In previous instances from the Uruguayan regulator they had indicated that the neutral rate was placed at 8%, but now they affirmed that this has changed. “The neutral rate is for us a real 2% rate. Clearly, with this rate of 8.5%, we are still below the neutral rate. Not to put a number, because it runs away, it’s a 2% real rate and today we are below that rate,” Labat said Thursday.

The Vice President of the BCU, Washington Ribeiro, pointed out that the monetary policy “remains expansive even with this rate hike.”

Consulted by Bloomberg Line, the manager of Economic Analysis of CPA Ferrere, Nicolás Cichevski, said that he received the decision in a positive way since “it was important not to be misaligned with the rest of the world.”

“Everything was given for a ‘strong’ announcement like the one that happened. To the local context we must add the fact that in recent days the Federal Reserve has transmitted that monetary policy will be more contractionary than expected by the market”, he said. He also explained that the announcements of new increases in rates in the United States have already generated a rise in the dollar in the local market and “to a certain extent could contribute to soften the impact on the exchange rate in Uruguay after this measure.”

The economist and partner of the consulting firm Exante, Tamara Schandy, had told Bloomberg Line last week that in this context a “more relevant” increase in rates than what had been done up to that time was expected. Meanwhile, the economist Walter Stoeppelwert of the Centennial Investment Fund said last Monday during the launch of the product that an advance beyond what was expected would be a “positive reaction” from the regulator.

Dollar in its “fundamentals”

Although since the beginning of April the dollar had a rebound and this Thursday it closed higher again at $42,059 in the wholesaler, the currency has so far this year fallen 6.23% against the Uruguayan peso, according to data from the Electronic Stock Exchange of Uruguay. The situation in Uruguay generated claims by exporters for competitiveness.

Asked at the press conference on the real exchange rate, Labat stated that the dollar is “reasonably aligned with its fundamentals.” “What cannot be done is draw very quick conclusions about the evolution of the exchange rate from movements in the interest rate,” he said. “Also you have to look at how the region evolves. We are in a scenario where the main countries of the region are beginning to move their monetary policy, so I think that an evolution of the exchange rate is not predictable today,” he added.

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