Uruguay’s central bank governor Diego Labat said the monetary easing cycle has all but ended following a half a percentage point reduction in its benchmark rate last week and 200 basis points in cuts since April, as inflation nears a 20-year low.
“We are reaching the rate that we believe is consistent with our inflation target,” he said in an interview with LatinFinance.
Labat said inflation has moderated to manageable levels, reaching a rate of 3.8% in September, the lowest in 17 years. It’s a far cry from an annual rate of 8.3% at the end of 2022 and well within the 3%-6% target for the first time since the bank adopted an inflation-targeting system.
“We are where we want to be [on inflation]. We would not mind seeing a continued reduction [in consumer prices], but we are on a clear path,” he said, adding that he sees an average inflation rate of “around 5.5%” over the next two years. “This is important given Uruguay’s long history with inflation,” Labat said on the sidelines of the annual World Bank/IMF meetings in Marrakech, Morocco.
While Labat would not rule out further rate cuts depending on economic conditions, he said: “We are going to be very cautious and continue to keep an eye on expectations.”
The sharp decline in prices has had a ripple effect, with Uruguay the first inflation-targeting country in South America to cut benchmark interest rates. Uruguay has lowered the rate four times this year, with the most recent reduction of 50 basis points in October. The rate now stands at 9.5 percent.
‘PERFORMING POORLY’
Uruguay enjoys a privileged position in South America, with inflation at multi-year lows. In contrast, inflation is above 120% in neighboring Argentina and its currency broke 1,000 pesos to the US dollar earlier this week.
“Argentina is performing poorly in some areas, but this is included in our calculation. We projected a scenario with Argentina not doing well,” Labat said.
Uruguay’s economy has been severely impacted by a harsh drought — the worst in the country’s modern history — that slammed the agricultural sector, the country’s economic motor, and triggered a potable water crisis in Montevideo, the capital. Agricultural production has slumped while economic output contracted by 2.5% in the second quarter compared to same period last year.
Labat said that the worst is over and that he expected a rebound in the second half of the year to continue into 2024, with the central bank forecasting gross domestic product to rise by some 4% next year.
The bank is closely monitoring external factors, including the U.S. Federal Reserve’s view on interest rates, the economic situation of neighboring countries and a slowdown in China, Uruguay’s top trading partner.
Uruguay’s exports rose 16.5% in 2022 from the year prior to $13.4 billion in 2022, with China accounting for 28% of the total. The Asian country’s economic downturn contributed to an 18% decline in Uruguay’s exports in the first half of 2023 from a year earlier.