Bloomberg News

Uruguay Keeps 8% Rate as Inflation Outweighs Slowdown Concerns

September 29, 2011

Sept. 29 (Bloomberg) -- Uruguay’s central bank kept its benchmark interest rate unchanged as policy makers focus on bringing inflation back to target over taking steps to cushion the $44 billion economy from a global slowdown.

The five-member policy committee, led by central bank Governor Mario Bergara, today kept the bank’s overnight rate at a two-year high of 8 percent. Eight of 11 analysts surveyed by El Pais newspaper expected a pause while three analysts forecast a rate cut.

Policy makers’ two rate increases in 2011 have pushed borrowing costs up 150 basis points, the second-biggest increase among Latin American central bank’s this year after Banco Central de Chile, and have helped to slow annual inflation from 8.61 percent in June to 7.57 percent last month. Even so, prices are expected to rise 7 percent in 2011 and 2012, above the upper limit of the bank’s target range of 4 percent to 6 percent.

The decision “gives a signal of caution in a context that inflation is still high but they want to see whether or not the turbulence in foreign markets will impact the economy or not,” said Florencia Carriquiry, an economist at Deloitte Montevideo Research, in a phone interview before the bank’s announcement.

After gross domestic product rose 6.6 percent in the first quarter from a year earlier, Uruguay’s economy cooled to post 4.8 percent year-on-year growth in the second quarter, the slowest pace since the October-through-December period of 2009. Economy Minister Fernando Lorenzo repeated today the government hopes the economy will expand 6 percent this year.

Among the vulnerabilities of Uruguay’s economy are its small size, which magnifies the impact of any shock such as a drought, and still high levels of dollarized debt.

“The crisis is a stress test for every country,´´ said Mauro Leos, an analyst at Moody’s Investors Service, in an interview today in Montevideo. “It’s probably going to be ugly and worse than we imagine now.´´

--Editors: Robert Jameson, Harry Maurer

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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