Bloomberg News

Uruguay May Raise Benchmark Rate to 8% as Prices Accelerate

June 23, 2011

(Adds bond yields in 10th paragraph.)

June 23 (Bloomberg) -- Uruguay’s central bank will likely raise its benchmark interest rate today as policy makers struggle to slow inflation that is accelerating beyond their target range.

The five-member policy committee, led by bank President Mario Bergara, will increase the rate at least 50 basis points, or 0.5 percentage point, to 8 percent today after boosting it 100 basis points on March 23, said Tamara Schandy, an economist at Deloitte Uruguay in Montevideo. Two other economists surveyed by Bloomberg also expect a half-point increase. The board will announce its decision after 4 p.m. New York time.

Annual inflation in the agriculture-based economy accelerated to 8.53 percent in May from 8.34 percent the previous month, above the upper limit of the central bank’s target range of 4 percent to 6 percent this year. Prices rose 6.93 percent in 2010, according to the Montevideo-based national statistics institute.

“We expect there will be a further adjustment of the interest rate and, considering how the economy is growing and the level of core inflation, we think it should be significant,” said Schandy. “We are working under the assumption that there will be a rise of at least 50 basis points.”

Analysts forecast annual inflation of 7.5 percent in 2011 and 7 percent in 2012, according to the median estimate in a central bank survey of 12 economists, banks, pension administrators and industrial chambers released last week.

Economy Minister Fernando Lorenzo said June 11 that the government is determined to stem price increases.

‘Target Shooting’

“The government must work hard when inflation isn’t within the central bank’s target,” Lorenzo told students in Montevideo. “But this isn’t target shooting. What needs to happen is that when deviations occur policies must be put in place to get things back to normal.”

Uruguay joined countries from Brazil to China May 11 in deciding to raise reserve requirements for banks, increasing the rate on peso deposits to 15 percent from 12 percent and on foreign currency deposits to 18 percent from 15 percent starting this month. The move is expected to keep $480 million in deposits from being loaned out, Bergara said. The bank also established a marginal reserve requirement on the growth of deposits.

“From the monetary policy perspective, we have been giving strong signs of fighting inflation and of our concern with this theme,” Bergara said in a June 20 interview at Bloomberg headquarters in New York. “To raise interest rates by 100 basis points was aggressive. If it was enough or not, we will see.”

Economic Growth

Yields on Uruguayan dollar bonds due in 2033 were little changed at 5.73 percent at 10:37 a.m. New York time. Yields have fallen 32 basis points, or 0.32 percentage point, this year. By comparison, yields on Mexican dollar bonds due in 2034 were little changed at 5.49 percent.

Uruguay’s $40 billion economy expanded 6.8 percent in the first quarter of 2011, the central bank reported Jun. 15. Unemployment rose to 6.6 percent in April after tumbling to a record 5.4 percent in December, the national statistics institute reported Jun. 10.

“The economic growth in the first quarter was far superior to what we believe is the sustainable trend,” said Schandy. “It seems that there are signs of overheating, with high levels of inflation, particularly in the non-tradable goods and services.”

Not Overheating

Bergara discounted that view, saying that while consumer spending is growing at a faster pace than gross domestic product, both are being balanced by a higher investment rate. The economy isn’t overheating, he said at a June 20 event for investors sponsored by ProCapital SBSA in New York.

Uruguay’s currency has gained 7.6 percent this year to 18.5 pesos per dollar yesterday, more than any of the six major Latin American economies tracked by Bloomberg. The Colombian peso has gained 7.2 percent and the Mexican peso 4.8 percent.

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

--Editor: Bill Faries

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

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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