The BCU anticipates being close to the end of its easing cycle

URUGUAY - Report 12 Oct 2023 by Esteban Fernández Medrano

The BCU's latest rate cut was no surprise as it was aligned with declining inflation. However, the objective of the monetary authorities to convince local market players to de-dollarize the economy suggests that local authorities might keep interest rates higher for a longer time frame than initially expected.

But such a decision, in combination with a free-floating exchange rate and still-strong capital inflow might make it more difficult for the local economy to adjust to the impact of real shocks (such as the drought), eventually risking more abrupt moves in the FX rate that might end up being contrary to the BCU's intention to de-dollarize the economy.

Perhaps the best response in the attempt to de-dollarize the economy might not be to keep rates higher for longer.

Now read on...

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