Uruguay became the first inflation-targeting country in Latin America to start lowering borrowing costs by cutting its benchmark interest rate a quarter point to 11.25% amid slowing inflation.
(Bloomberg) — Uruguay became the first inflation-targeting country in Latin America to start lowering borrowing costs by cutting its benchmark interest rate a quarter point to 11.25% amid slowing inflation.
The central bank had lifted its key rate 700 basis points to 11.5% between August 2021 and December 2022 as inflation accelerated to almost 10% last year. The monetary authority’s move on Thursday marked its first rate cut since the central bank readopted a benchmark rate as its main policy tool in September 2020.
“This decision is consistent with the continuity of a contractive monetary policy and the objective of continuing efforts” to bring inflation and inflation expectations within the 3%-6% target range, the central bank said in a statement.
Major central banks across Latin America have kept interest rates at multiyear highs even as inflation gradually retreats after hitting double-digits in several countries during 2022. Policymakers are concerned that premature easing might collide with an upsurge in consumer prices that would damage their credibility. In neighboring Brazil, the economic fallout from high interest rates spurred President Luiz Inacio Lula da Silva to publicly chastise his central bank for strangling growth.
Read More: Latin America Warns Markets of Long-Haul Fight Against Inflation
Uruguay’s central bank under the leadership of economist Diego Labat has come under fire from exporters who say high borrowing costs are contributing to an overvalued currency. The peso has appreciated 2.3% this year, after gaining about 12% in 2022.
A strong currency has helped curb inflation, which fell to a 20-month low of 7.3% in March. Even so, market participants are skeptical that policymakers will hit their target, with the central bank’s most recent monthly survey of analysts forecasting 6.95% inflation in December 2024.
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