Uruguay holds rate, warns of inflation and expectations

    Uruguay's central bank held its policy rate steady at 9.25 percent although the bank said the actual inflation rate and inflationary expectations were well above the bank's target range.
    However, considering the need to balance economic policy objectives and the recent rise in marginal reserve requirements, the bank's monetary policy committee said it decided to maintain the policy rate.
     The central bank of Uruguay, which raised its policy rate by 50 basis points in 2012, is raising marginal reserve requirements on local and foreign currency deposits from April 1 to slow down credit growth and inflation.
    The reserve requirement for deposits in Uruguayan peso will rise to 25 percent from 20 percent while the requirement on foreign currency deposits will rise to 45 percent from 40 percent.
    Uruguay's inflation rate rose to 8.89 percent  in February from 8.72 percent in January, significantly above the central bank's target of 4-6 percent.

    In December, Banco Central del Uruguay (BCU) also said inflation and inflationary expectations were well above its target.

      The central bank said the country's economy was growing at a reasonable rate but the current composition of growth cannot mitigate the inflationary impulses at the desired pace.

    "Inflation is a major concern among the risks facing Uruguay's economy," the bank said, adding:
    "Both the actual inflation rate and the expectations of the agents remain well above the target range."
    Uruguay's Gross Domestic Product expanded by a quarterly growth rate of 1.2 percent in the third quarter for annual growth of 3.0 percent, down from the second quarter's 3.8 percent.
    The central bank said earlier this month that the economy expanded between 3.0 percent and 3.5 percent in 2012, down from 5.7 percent in 2011 due to drought and weak global growth.
    In its latest annual review of Uruguay, the International Monetary Fund said the country's main challenge was to tackle inflation and the central bank should maintain a tightening policy bias.
    The high inflation rate reflects "robust domestic demand, extensive wage indexation, food price shocks, and insufficiently tight monetary stance, and an inflation target that is not anchoring expectations within the range," the IMF said, adding higher global food prices had added to the inflationary pressures.
    Uruguay is also experiencing heavy capital inflows due to its high interest rates and its investment grade rating.

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