The Central Bank of Uruguay (BCU) maintained its benchmark interest rate at 5.75% on Tuesday, marking the second consecutive policy meeting in which the rate was held steady. The bank cited elevated oil prices stemming from conflict in the Middle East as an upward risk to inflation and highlighted the resulting volatility in energy costs.
The decision matched expectations from financial institutions surveyed by the BCU, which generally anticipate that the policy rate will remain unchanged through August. The bank has, however, eased policy throughout the past year - implementing seven rate cuts since last July that amount to a cumulative reduction of 3.5 percentage points through March. Those cuts were designed in part to offset currency appreciation that had contributed to inflation undershooting the central bank's 4.5% target.
Recent price data show annual inflation at 3.16% in April, with core inflation at 3.45%, continuing a convergence trend toward the 4.5% objective. Two-year inflation expectations from analysts and financial markets remain anchored at the 4.5% target. By contrast, company surveys indicate an expectation of 5%, and the overall average expectation stands at 4.67%.
In its accompanying statement, the BCU emphasized that the ongoing conflict in the Middle East is keeping energy prices high, contributing to volatility and additional inflationary pressure. The bank also noted that rising long-term interest rates are producing a less favorable financial backdrop for emerging economies, a factor it is monitoring as it evaluates future policy settings.
On the domestic activity front, available indicators point to a rebound in economic activity and employment during the first quarter. The BCU said moderate growth is expected to persist through the remainder of the year. Nonetheless, the Monetary Policy Committee assessed that the balance of risks to the inflation outlook has tilted slightly upward. This reassessment reflects a greater-than-anticipated persistence of elevated oil prices relative to the committee's expectations at the previous meeting.
With inflation still below target but risks skewed higher due to energy markets, the central bank's decision to pause further easing preserves optionality while acknowledging a modestly worsened inflation-risk profile linked to external developments.