Uruguay’s Central Bank Increases Reference Rate to 9.25%

Uruguay’s central bank raised its benchmark interest rate for the second time this year as policy makers struggle to bring inflation into the government’s target range.

The five-member policy committee, led by bank President Mario Bergara, raised the benchmark rate 25 basis points for a second straight meeting today to 9.25 percent.

“Inflation continues to be the key risk to the Uruguayan economy,” the bank said in today’s statement. “If the inflationary threat isn’t decidedly dealt with, we risk interrupting or partially reversing the gains made in terms of growth, competitiveness, poverty reduction and distribution of wealth.”

Annual inflation in the agriculture-based economy slowed to 9.03 percent in November from 9.11 percent the previous month, above the bank’s target of 4 percent to 6 percent. The Economy Ministry doesn’t rule out further measures to rein in inflation, such as postponing water and energy tariff increases.

Today’s increase signals a “stronger commitment to reducing inflation,” said Pablo Rosselli, an economist at Montevideo-based research company Deloitte Uruguay. Consumer prices will rise 8.4 percent in 2012 and 7.6 percent in 2013, according to the median estimate in a central bank survey released this month.

“Inflation will continue above 8 percent for most of next year and will require a vigilant position from authorities,” said Alfonso Capurro, an economist at Montevideo-based research company CPA/Ferrere.

Pulp Mill

The central bank on Dec. 13 reported that Uruguay’s $45 billion economy expanded 3 percent in the third quarter from a year earlier and 1.2 percent from the previous quarter. Construction expanded 12 percent, mainly because of the building of a $2 billion pulp mill in the west of the country, the bank said.

The economy will expand 3.6 percent this year and 4 percent in 2013, according to the median estimate of 9 economists surveyed by the central bank in December.

Uruguay’s credit rating was raised to investment grade by Standard & Poor’s in April and by Moody’s Investors Service in July after the South American country reduced debt and diversified exports. Moody’s lifted Uruguay one step to Baa3, the lowest investment grade, and maintained its positive outlook. Fitch Ratings places the country one level below investment grade.

To contact the reporter on this story: Lucia Baldomir in Montevideo at lbaldomir@bloomberg.net

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net

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