(Bloomberg) -- Uruguay’s next government may have room to set a lower target for annual consumer price gains as monetary policy reins in one of the fastest inflation rates among the country’s investment grade peers, central bank Chairman Washington Ribeiro said in an interview.
A government report Monday showed consumer prices rose 5.45% in July from a year earlier, the 14th straight month they’ve printed inside the central bank’s 3% to 6% target range. That’s no small feat for a country where consumer price gains averaged 8.5% from 2001 to 2023.
Building on that achievement, the central bank can facilitate the adoption of a new target by further lowering inflation and inflation expectations in the coming months, according to Ribeiro.
“Thinking long-term, Uruguay should propose an objective of 3%” for the midpoint of the target range, he said Monday at his office in Montevideo. “But not in the short or medium term.”
The central bank forecasts that inflation will stay on target during its 24-month policy horizon, slowing to 4.5% by the end of that period. July’s inflation reading — below the estimates of all economists surveyed by Bloomberg — reduces the risk that consumer prices will test the target ceiling, Ribeiro said.
“Our challenge is for expectations to continue converging” toward 4.5%, he said.
Ribeiro was sworn in as chairman last month after his predecessor, Diego Labat, resigned to become the senior economic adviser to National Party presidential candidate Alvaro Delgado. Uruguay holds general elections in October and the new government that takes office March 1 will name the central bank’s three-member board.
The central bank under Labat returned to using a benchmark interest rate as its main policy tool in 2020. After ratcheting up borrowing costs to 11.5% to fight a post-pandemic inflationary surge, Uruguay became the first South American country to start cutting rates in April 2023.
Several central banks in the region have adopted a more cautious policy stance due to uncertainty about inflation. Brazil held the Selic rate at 10.5% for a second straight month on July 31, the same day Chile paused its year-long easing cycle. Colombia, a late comer to the rate cutting party, lowered its key rate by half a point in a split vote that suggests resistance to faster easing.
Uruguay has kept borrowing costs at 8.5% since May as it targets 4.5% inflation with a tolerance of plus or minus 1.5 percentage points. The key rate is currently at a neutral to mildly contractive level, Ribeiro said.
Critics say high interest rates have contributed to an overvalued currency that helped the central bank contain inflation in Uruguay’s heavily dollarized economy at the cost of eroding the competitiveness of exporters.
“The exchange rate is set by the market without the intervention of the central bank” except under scenarios of extreme volatility, Ribeiro said. “The exchange rate isn’t an inflation anchor.”
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