Brazil & Southern Cone - October 2010 (ISSN 1741-4431)

On 23 September the central bank raised interest rates from 6.25% to 6.5%, on concern about inflation. On 4 October the national statistics institute (INE) reported that monthly consumer prices rose 0.3% in September, bringing the annual rate to 6.32%. In 2009 inflation was 6.9%. The central bank's target for 2010 is for an annual inflation rate of between 4% and 6%.

The big danger in pushing up interest rates is that the peso will now appreciate. Few economists believe that the quarter point rise in rates will have much effect on inflation or inflationary expectations, despite the central bank's protestations. Further rises in interest rates look inevitable. Even after the quarter-point rise, interest rates are still effectively zero in real terms. Monetarists also point out that the money supply is expanding faster than nominal growth warrants. Inflation is unlikely to get seriously out of hand, however, because the government sets key tariffs such as gas and electricity. The government appears to want to keep these prices steady, which will reduce inflationary pressure in the economy, though at a cost of weakening the government's fiscal position.
The government's fiscal position is already under pressure, because congress increased budgetary spending without increasing taxes. Arguably this may not matter if the economy keeps on growing as fast as it has been (the local consensus is for 7% growth in 2010) because tax revenues will increase faster than budgeted. Real wages should rise about 4% in 2010, which should translate into further strong GDP growth, powered by domestic demand, in 2011.
If the peso starts to rise on the back of expectations of higher interest rates, business will become more difficult for exporters. The government is on record as saying that it wants to keep the peso at between Ur$21 and Ur$22 to the dollar. On 4 October it was trading at Ur$20.55 to the dollar.

Exports: In the first nine months of 2010 exports increased 23% year-on-year to US$5.03bn. The figures come from the Instituto Uruguay XXI.