Latin America swimming against the tide as Uruguay likely to go for another rate cut
Business
South American nation has led the region's pivot to slash interest rates
MONTEVIDEO (Reuters/Web Desk) – Uruguay's central bank is likely to cut its benchmark interest rate again at its next monetary policy meeting in October as inflation has fallen to a near two-decade low, governor Diego Labat told Reuters on Friday.
The move represents the trend being witnessed in Latin America where central banks are moving a direction opposite to the developed economies like US and Europe.
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In July, Chile became the first major central bank in Latin America to cut interest rates by 100 bps, following in the footsteps of smaller peers Costa Rica and Uruguay which had lowered benchmarks in recent months.
And last month, Brazil's central bank kicked off its rate-cutting cycle more aggressively than expected, reducing its benchmark interest rate by 50 basis points and signalling more of the same in the months ahead due to an improving inflation outlook.
The bank's rate-setting committee cut its policy rate to 13.25 per cent, as just 10 of 46 economists surveyed by Reuters had anticipated. The rest expected a smaller reduction of 25 basis points.
Uruguay has led the region's pivot to rate cutting after sharp hikes by central banks around Latin America in recent years to rein in prices, an aggressive tightening cycle that helped many get inflation under control.
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"Interest rates today are at 10pc, probably we can decrease rates in the next session, though it depends on the inflation path," Labat said in an interview at Uruguay's central bank in downtown Montevideo.
Uruguay saw annual inflation come down to 4.1pc last month, the lowest level since 2005, which has opened the door for more easing. The central bank has cut rates three times this year after first lowering the rate to 11.25pc from 11.5pc in April.
"Inflation is on a good path," Labat said, adding he was optimistic about prices towards the end of the year, which he said typically had low inflation. The bank was on track, he added, to hit its 5pc annual inflation target this year.
Uruguay's farm-driven economy is this year forecast to grow just 1pc, down from 4.9pc last year due to a severe drought that wreaked havoc on agricultural exporting economies across the region at the end of 2022.
But Labat is confident the Uruguayan economy will rebound strongly next year.
"We are very optimistic about 2024, with a 4pc GDP (growth) forecast," Labat said, which he largely attributed to more promising harvests.
COLOMBIA WANTS LOWER RATES, MORE INVESTMENT
Earlier this week, Colombia's government and industry associations called on the central bank to lower interest rates and urged business leaders to resume investment decisions, in a bid to shore up the economy.
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Latin America's fourth-largest economy expanded 0.3pc in the second quarter, much less than expected. The central bank has forecast growth of 0.9pc for 2023, well below the 7.3pc growth last year.
"We need to recover the economy," Finance Minister Ricardo Bonilla said in a statement after meeting with Colombia's major business associations. "What are we missing? The creation of the financial conditions so that we all go in the same direction."
Between April and June private investment in Colombia plummeted 24pc versus the year-earlier period.
Businesses should not postpone investment decisions, said Jonathan Malagon, president of Colombia's banking association, Asobancaria, adding that reduced borrowing costs amid lower interest rates are expected in the future.
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"Let's not postpone, let's not give up, let's not surrender, liquidity conditions in the Colombian economy are trending upward," he said.
Colombia's interest rates are at their highest level in a quarter of a century, ratcheted upwards due to the global inflationary shock that followed the coronavirus pandemic.
The central bank has held its benchmark interest rate stable at 13.25pc at its last two rate meetings, after increasing it by 1,150 basis points between September 2021 and April 2023 to deal with inflation.
Both business leaders and the finance minister called on the central bank to begin cutting the rate.
"We believe that there are several conditions that today allow us to think of a path to reduction - which hopefully will start relatively soon - for the interest rate," said Bruce Mac Master, president of the Colombian business association ANDI.
Most analysts expect the first cut to the benchmark rate to fall in September or October.
