The Central Bank of Uruguay (BCU) has taken a decisive step to stabilize the nation's economic landscape, announcing a significant reduction in its Monetary Policy Rate (TPM). This strategic move aims to guide inflation back towards its long-term target amidst evolving domestic and international financial conditions.
Strategic Rate Cut and Inflationary Context
The BCU's Board resolved to cut the Monetary Policy Rate by a substantial 100 basis points, bringing it down to 6.5%. This decision underscores the central bank's commitment to ensuring monetary conditions support the convergence of inflation towards its annual goal of 4.5%, particularly as projections indicated a potential deviation from this objective. Notably, inflation concluded 2025 at 3.65%, falling below both economic agents' expectations and the bank's own forecasts. Furthermore, average two-year inflation expectations have continued to decline, closely aligning with the target, indicating a reinforcing need for sustained monetary impulse.
Navigating Market Dynamics and Future Flexibility
The proactive rate reduction was influenced by a confluence of factors, including heightened uncertainty in international policy which contributed to a global weakening of the dollar, particularly impacting Latin America. Domestically, this effect was amplified by increased sensitivity in the exchange market, characterized by occasional imbalances in buy and sell orders, reduced liquidity, and discrete movements. These dynamics threatened to push inflation outside its ±1.5% tolerance range, prompting the BCU to deepen and accelerate its rate-cutting cycle, signaling an entry into an expansive monetary policy phase. Looking ahead, the BCU has pledged to utilize appropriate instruments to maintain orderly market conditions and keep inflation within its target range, should exceptional domestic situations arise. To ensure maximum flexibility, the Board has also scheduled an additional meeting with the Monetary Policy Committee (Copom) in March, allowing for further evaluation of potential expansive policy adjustments.
