Uruguay Set to Keep 8.75% Benchmark Rate to Tame Inflation

Uruguay’s central bank will probably keep its benchmark interest rate unchanged today as above-target inflation outweighs concern that the country’s economy is slowing more than expected.

The five-member policy committee, led by bank President Mario Bergara, will keep the rate at 8.75 percent for the second straight meeting after raising it 75 basis points, or 0.75 percentage point, in December 2011, according to all four economists surveyed by Bloomberg. The board will announce its decision about 5 p.m. local time.

Annual inflation in the agriculture-based economy was little changed at 8 percent in June compared with 8.06 percent the previous month, above the upper limit of the central bank’s target range of 4 percent to 6 percent. Prices rose 8.6 percent in 2011.

“The international situation today is riskier, but the central bank cannot lower rates because inflation is at uncomfortable levels,” said Florencia Carriquiry, an economist at Deloitte Uruguay in Montevideo.

Since September 2010, the bank has raised borrowing costs at four of its seven meetings to push the overnight rate up by 2.5 percentage points from 6.25 percent.

The government forecasts inflation will slow to an average of 7.6 percent in 2012, according to budget estimates submitted to congress last month. Analysts expect consumer prices will rise 7.8 percent in 2012 and 6.9 percent in 2013, according to the median estimate in a central bank survey released in June.

“Inflation will remain around 8 percent unless commodity prices fall further,” said Carriquiry, who forecasts inflation of 7.7 percent this year.

Economic Growth

The central bank on June 14 reported that Uruguay’s $45 billion economy expanded 4.2 percent in the first quarter of 2012 from same period last year, which Carriquiry called positive even though it was probably overshadowed by the worsening global outlook.

“The international context imposes more risks to economic activity, and that is something the central bank will take into account in its decision,” Carriquiry said.

The International Monetary Fund forecasts the country’s gross domestic product will expand 3.5 percent in 2012, down from 5.7 percent last year and 8.9 percent in 2010.

The closing of the La Teja refinery for maintenance and a subsequent workers’ strike weighed on growth from August until the facility re-started in January. Rising import barriers in neighboring Argentina are also undercutting Uruguay’s economy.

Capital Flows

Brazil’s decision to cut its benchmark rate for a seventh straight meeting in May to a record low 8.5 percent combined with slowing growth in Latin America’s biggest economy will help make Uruguay more attractive to international investors, Bergara said May 22.

Speaking to reporters, Bergara also said that Uruguay’s return to investment grade standing for the first time in a decade should boost capital inflows and investment.

Standard & Poor’s on April 3 raised Uruguay’s credit rating one level to BBB-. Fitch Ratings and Moody’s Investors Service rate the country one level below investment grade.

The peso has declined 10.3 percent in the last three months to 21.75 per dollar today, the weakest level since September 2009. The peso has been the world’s third-worst performing currency during the past three months among 171 tracked by Bloomberg, beating only the Syrian pound and Malawian kwacha, according to data compiled by Bloomberg.

The yield on Uruguayan dollar bonds maturing in 2022 has declined 50 basis points, or 0.5 percentage point, to 3.32 percent in 2012, according to data compiled by Bloomberg. The price of the securities is up 3.86 cents to 140.7 cents on the dollar.

The central bank committee’s next quarterly meeting will be in September.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE