“We are not entering a cycle of rate increases,” said the president of the BCU and why it is “the best moment in the history” of bonds

On Thursday the Banco Central (BCU) he raised his reference interest rate (the “price of money”) by 25 basis points until it reaches 6% so that inflation converges towards its goal of 4.5% and anchored expectations, after maintaining it for four consecutive meetings of its Monetary Policy Committee (Copom). Yesterday, in a meeting with journalists, the president of the BCU, William Tolosapointed out that “the increase in the reference interest rate does not mean that we enter a cycle of rate increases; “We must continue to evaluate the increase in localized prices and how resilient the Uruguayan economy continues to be.”

Even so, Tolosa clarified that the alternative of raising the rate again at the Copom meeting in November or December is not ruled out, if the board deems it necessary.

For now, additional increases in the “price of money” in the remainder of the year will depend on upcoming data from inflation and the evolution of the gap Gross domestic product (GDP), that is, the difference between real and potential GDP.

Analysts consulted by El País on Thursday focused on “the other side of the coin”, in the sense that the increase in the interest rate, on the one hand, slows down inflation, but on the other favors saving above consumption, just when the activity (on the demand side) is driven by consumption.

The question that analysts ask themselves, then, is to what extent to favor savings when that goes against the recovery of economic activity at this time, in addition to making the cost more expensive. credit; aspects that the BCU is monitoring.

The Central Bank considers that a real interest rate of 2.5% is “neutral”, so above that level, the monetary policy it will be “contractive” and below that level “expansive”.

With inflation expectations of 4.71% (average of analysts, market operators and businessmen) plus a neutral real rate of 2.5%, the “price of money” that would be neutral is 7.21%. Thus, the current reference rate of 6% continues to be “expansive”, although a little less than the previous one.

To look at it another way: currently the real reference interest rate is 1.29% (6% nominal interest rate minus 4.71% average 24-month inflation expectations).

Despite the recent acceleration of inflation (it went from 4.27% in the 12 months to July, to 4.55% in the 12 months to August and to 4.68% in the 12 months to September), Uruguay is the one that has been closest to its inflation target this year among a group of compared countries. This, despite strong upward pressures from external shocks (such as the international price of oil, impacts of the Middle East war on global food transportation, among others).

Thus, the deviation of inflation from the target in September was 2.55 percentage points in Peruof 1.5 percentage points in Australia and in Brazilof 1.1 percentage point in Chile, of 1 percentage point in Francewhile in Uruguay the deviation was 0.18 percentage points.

The Central clarified two issues: firstly, that the goal of 4.5% inflation that has been set for two years (even if it has been met at different times before that deadline), and that the The price increase that occurred recently was not widespread, but above all in the tradable goods (those that are traded abroad) of the economy, which is why the BCU prefers to talk about “increase in the Consumer Price Index” (CPI) and not “inflation” as such, in this case.

The core inflation (which excludes volatile elements such as the evolution of fruits and vegetables, meat and tariffs) is at 4.5% in the 12 months to September. And in line with international experience, the increase in prices of services continues above that of goods, although both show a trend compatible with the convergence of inflation towards the 4.5% target.

The BCU insists on the importance of anchoring inflation expectations to the target for three reasons: when market agents are confident that inflation will return or remain at the target in the future, they place less emphasis on the prices today; Furthermore, the transient shocks are less able to spread to the rest of the economy, and financial investors and those who extend credit require a lower interest rate to cover price increases and currency depreciations.

Greater credibility at the Central translates, for example, into the evolution of the yield of Uruguayan bonds.

“If we compare with advanced countries, such as the United States, France or Australia, and also with some in the region, such as Peru and Chile, our country has the emerging bonus with the best performance since June 2025,” stated Tolosa.

This means that, according to BCU data, there was no other monetary regime that matured more—or “that became more credible,” in the words of Toulouse— than the Uruguayan in the last year and a half.

Photo: El País Archive

“When the war (US-Iran) starts, all the bonds felt the ‘shock’ of the turbulence and the financial pressure more than Uruguay. The bond rate has increased since July 2026, especially in France (+115 basis points) and in USA (+79). On the other hand, Uruguay (+36), Japan (+32) and Switzerland (+19) had the bonds that increased their rates the least, that is, their value decreased the least,” he observed.

“It’s hard to believe, but today the Uruguayan market is considered safer, less volatile and less uncertain than Peru, Chile and the United States. Uruguay pays significantly less in terms of risk premium than those countries, with respect to the reference assets,” he stated. And he continued: “This has no precedent in the history of the country and we do not celebrate it enough. It is the best moment in history for Uruguayan bonds“said the president of the BCU.

The oldest credibility of the BCU It also allows Uruguay – Tolosa continued – to go into debt paying 2 percentage points less interest than in the years in which the monetary regime was not fully consolidated.

“That also has a huge effect on the public accountsparticularly for the Central Bank, where we are going to reduce the deficit by half,” he announced, specifying that this year the BCU deficit will go from 1% of GDP to 0.5% of GDP. And also for the central government, which increasingly issues debt in pesos.

“All this spills over to the rest of the companies in the economy, because these rates They are a reference for banks when they set loans to companies,” he noted.

The BCU estimates that the gap Product (real versus potential) is slightly negative (it is limited) and that it will close towards the two-year monetary policy horizon, with activity growing around its trend. This means that the BCU predicts that activity will recover starting this quarter and in 2027.

“We are at a time when Uruguayans have the greatest purchasing power and it continues to grow, in part due to inflation gains, because they continue to create employment and the unemployment “It continues to be low, around 7.3%,” said Tolosa. He added that credit rises to 11.2%, with room to grow more.

As latent risks For rising inflation in the country, there are: greater persistence of increases in energy prices, a greater than projected effect of the cymatic shock, or some unanchoring of inflation expectations. On the other hand, the forces of downward inflation would be given by a lower demand than what the BCU projects to moderate the pressures on prices and the strengthening of the real in Brazil.

About the evolution of dollarthe BCU noted that “it could move in both directions.”