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AmericasFebruary 16 2022

Growing economy gives Uruguay monetary policy options

Uruguay’s central bank governor speaks to The Banker about managing inflation, de-dollarisation and digital assets.
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Growing economy gives Uruguay monetary policy options

Diego Labat, an economist, was appointed governor of Banco Central del Uruguay in March 2020. This coincided with the arrival of the pandemic to the country, creating one of the toughest economic and financial environments of the past two decades.

Q: The economy grew 4% last year and is forecast to grow at a similar rate this year. How has this influenced monetary policy decisions?

A: Uruguay began expanding at a healthy pace in 2021, which is likely to continue in 2022. This is going to let us modify our monetary policy. In 2020 and 2021, this was expansive to respond to the pandemic, allowing for the recuperation. Now, we are able to be a bit more restrictive and expect to be in neutral territory by the end of the first quarter.

Q: One of the consequences of the expansive policies has been inflation around the world. Last year it was just shy of 8% in Uruguay, which is outside the target band. What is planned to lower it?

A: Inflation is our principal concern and we are going to continue applying a more restrictive monetary policy to bring it under control.

Inflation is our principal concern and we are going to continue applying a more restrictive monetary policy to bring it under control.

Uruguay was one of the few countries in the world where inflation was lower last year compared to 2020, when it was nearly 10%, but we are not pleased. We have high expectations to move into the target band of 3–6% in the next year. Right now, the forecast is 6.6%, which is still outside the target, so we will continue with the restrictive policies.

Q: The expectation is for the benchmark interest rate to increase a few more times this year, possibly reaching 8%. Critics fear capital speculation — what is your response?

A: We increased the rate by 75 basis points in January, stating that this would likely be repeated again in the first quarter of this year.

Comments about capital speculation have been around since we started raising rates in August 2021, and the truth is that we have not had an influx of speculative capital. If it does happen, it would be another element we would consider when defining policy. It is not a concern right now.

Q: In addition to taming inflation, the other policy underway is a more aggressive de-dollarisation strategy. What does this entail?

A: Uruguay does not have restrictions on foreign currency and this is not going to change. However, we believe that excessive dollarisation of the economy is a drag on growth. This is at the root of our approach to gradually de-dollarise the economy — it will contribute to a more robust monetary policy.

The short-term objective is lowering inflation, while de-dollarisation is a long-term strategy to strengthen growth.

Q: Is there something in particular you are doing on de-dollarisation?

A: It is a general strategy. Every decision made by the central bank is made from the de-dollarisation angle. One decision has been reducing the reserve requirement in pesos, which is 15 points lower than in dollars. This has been gradual, with the last change in January.

Q: Central banks are discussing the use of digital assets. What is your take on this?

A: Digital assets have some virtues, providing technology changes that can help with efficiencies, but we have to be careful because they pose a series of risks for the economy and financial system.

As a central bank, we cannot overlook their existence and need to make decisions. We launched a conceptual framework in December to begin understanding what regulations might look like. We need to be ready to regulate, so that their use is orderly.

Q: Environmental, social and governance policies are another area of change, and in August the central bank signed a “sustainable finances agenda”. What are the components of this?

A: It is an agenda for the entire government. We have developed several initiatives, including a decision last year to progressively increase investment of our international reserves ($16bn) in green assets. We are evaluating the financial system with the help of the World Bank and International Monetary Fund. This will include stress tests based on climate change. The evaluation will conclude later this year.

This is very important for the country. We are committed to growing the economy, but in a context where financial resources flow to what is sustainable.

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Read more about:  Americas , Americas , Uruguay