URUGUAY – BCU keeps policy rate at 5.75%, as widely expected

At today’s monetary policy meeting, the Central Bank of Uruguay (BCU) unanimously decided to keep the policy rate unchanged at 5.75% for the third consecutive meeting. The decision was fully in line with both our expectations and market consensus. Compared with the previous statement, the tone became less hawkish and more balanced, as the Board shifted its focus from external inflationary risks toward the resilience of inflation expectations and the transitory nature of recent price pressures.

The Board assessed risks as broadly balanced, noting the recent easing of geopolitical tensions in the Middle East and the resulting moderation in energy-price pressures and global financial market volatility. The BCU highlighted that analysts’ two-year inflation expectations remained stable at 4.5%, while financial market expectations edged up only marginally to 4.67%, while firms’ expectations reached 5.0%. The emphasis on well-anchored expectations became a central element of the statement, with the Copom arguing that such anchoring should help prevent temporary supply shocks from translating into persistent inflationary pressures. We estimate the ex-ante real policy rate at 0.98%, still well below the BCU’s neutral real rate estimate of 2.5%, suggesting that the monetary stance remains accommodative.

Regarding activity, the BCU noted that growth projections remain broadly unchanged, pointing to a moderate pace of economic expansion ahead amid the effects of the recent drought on the agricultural sector. This contrasts with the previous statement, which placed greater emphasis on the resilience of activity and employment indicators during the first quarter.

Among the upside risks to inflation, the Board highlighted potential developments in international conflicts and the possible effects of El Niño-related weather conditions on domestic prices. On the downside, risks stem from a weaker U.S. dollar and a sharper-than-expected decline in commodity prices.

Our view: The BCU remains data-dependent and continues to view inflation expectations anchoring as the cornerstone of its monetary policy framework. We expect the policy rate rise to 6.25% by end-2026, particularly if a stronger global dollar, a more restrictive Fed stance, or renewed exchange-rate pressures lead to a less favorable inflation environment. That said, today’s communication suggests that the bar for tightening has increased somewhat, reflecting the Board’s assessment that inflation expectations remain well anchored and that the recent pickup in inflation is largely transitory. The next monetary policy meeting is scheduled for August 18.