Uruguay’s central bank kept its benchmark interest rate unchanged today as policy makers struggle to rein in inflation without damping economic growth.
The five-member policy board, led by bank President Mario Bergara, left the rate at 8.75 percent after raising it 75 basis points, or 0.75 percentage point, at their last meeting Dec. 29.
Inflation in the agriculture-based economy slowed to 7.94 percent in February from 8.05 percent the previous month and has been above the upper limit of the central bank’s 4 percent to 6 percent target range for 26 months. Prices rose 8.6 percent in 2011.
“Price stability continues to be a focus of concern,” the board said in a statement announcing the decision. Though price rises are starting to slow, they are still significantly above target, the board added.
External prices that influence costs in Uruguay continue to rise while domestic demand remains strong. Economic activity is expanding at a reasonable pace, policy makers said.
“The decision is consistent with the commitment to fighting inflation,” said Alfonso Capurro, an economist at CPA/Ferrere research company in Montevideo. “Inflation will be lower in March but we expect it to be close to 8 percent in the second quarter of the year.”
Bergara said on March 1 that the government is determined to stem price increases.
“We remain concerned because rates still are above our target, without being out of control,” he told reporters in Punta del Este, Uruguay.
Inflation will slow to 7.21 percent in 2012 and 6.83 percent in 2013, according to the median estimate in a central bank survey of 12 economists, banks, pension administrators and industrial chambers released March 14.
“The country’s main economic challenge continues to be inflation,” Barclays Capital said in a March 8 report. “The results on the inflation front have been frustrating.”
A strengthening currency that policy makers are counting on to help fight inflation will also contribute to slower growth this year, Barclays said. Uruguay’s peso has gained 2.8 percent to 19.4 per U.S. dollar this year.
Gross domestic product expanded 3.5 percent in the fourth quarter of 2011 from a year earlier, the slowest quarterly growth rate in more than two years, the central bank said on March 22. GDP expanded 5.7 percent in 2011, down from 8.9 percent in 2010.
The closing of Uruguay’s only refinery for maintenance and a subsequent workers strike slowed growth from August until the facility re-started in January. A drought that started at the end of the year and rising import barriers in neighboring Argentina are also hitting the $44 billion economy, said Pablo Moya, an economist at Montevideo-based Oikos Research Co.
The central bank committee’s next quarterly meeting will be in June.
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