Uruguay’s Central Bank Signals End to Rate Cuts in Effort to Tackle Inflation

The central bank flagged in its Thursday policy meeting that its current easing cycle might be nearing an end after lowering the key rate by 200 basis points to 9.5% since April

Diego Labat, chairman of Uruguay's Central Bank
By Ken Parks
October 08, 2023 | 12:02 PM

Bloomberg — The central bank that led South America in lowering interest rates this year might become the first to halt the cuts as it seeks to lower Uruguay’s above-target inflation expectations.

The central bank flagged in its Thursday policy meeting that its current easing cycle might be nearing an end after lowering the key rate by 200 basis points to 9.5% since April. The monetary authority also lifted its two-year rate forecast by around 100 basis points to roughly 9% in 2025.

Monetary policy will stay contractive to lower sticky inflation expectations and keep a lid on consumer prices, chairman Diego Labat said in an interview in Montevideo.

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“We are approaching what we understand is the rate path we are going to have for the next 24 months under current conditions,” he said.


Labat left the door open for more rate cuts if inflation remains within the 3% to 6% target and expectations continue converging with that range. A deterioration in those indicators would spur policymakers to hike rates, he said.

“This central bank is committed to reacting if there is any deviation from our objectives,” Labat said.

Uruguay’s peers are still in full easing mode with Chile, Brazil, Peru and Paraguay expected to keep lowering borrowing costs this year as inflation recedes. Colombia is widely tipped to join South America’s rate cutting club in the coming months.


The central bank under Labat readopted a benchmark interest rate as its main policy tool in September 2020 after years of failing to contain inflation by using monetary aggregates. Maintaining a contractive policy stance also aims to strengthen the credibility of Uruguay’s relatively young inflation targeting regime, he said.

Labat’s concerns aren’t misplaced if history is any guide. Uruguay lived with average annual consumer price gains of almost 8% the last 20 years thanks to inflation protection mechanisms baked into contacts and wage agreements. Brief periods of relatively low — by local standards — inflation were followed by price surges that occasionally topped 10%.

The inflation rate has tumbled since late 2022 in the face of high rates, a strong currency that makes imports cheaper and lower commodities prices.

Consumer prices increases in September hit the slowest pace in 18 years at 3.87%, notching a fourth straight month within the target range. Even so, the central bank sees inflation accelerating to about 5% in December and reaching 5.7% in late 2025. The inflation outlook has steadily cooled in central bank surveys, but is still higher than 6%.


“Uruguay has a lot of room for lower inflation and therefore lower rates. I can’t imagine high rates forever,” Labat said.

Other key items from the interview:

  • It’s too early to know if Latin America will join developed countries, blocs in adopting a “higher for longer” monetary policy stance
  • Prolonged high rates, protectionism will lead to slower global growth
  • The central bank doesn’t foresee a full blown economic crisis in neighboring Argentina
  • Labat expects the new government that takes office in December will seek to stabilize Argentina’s economy
  • Uruguay’s FX rate will slowly correct some, but not all, of its misalignment with other currencies

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