WASHINGTON: Uruguay's economy is set to grow 3.5 percent this year and 4 percent in 2013, but persistent inflation remains a concern for the South American country, the International Monetary Fund said on Fri day.
Uruguay's central bank recently raised its benchmark interest rates to cool inflation expectations. But price growth remains stuck above the government's 4 to 6 percent target range, the IMF said after its annual mission visit to the country. The IMF had previously projected inflation to hit 7.9 percent in 2012.
"The (central bank)'s recent policy rate increase was a welcome step, and it would be important to maintain a tightening bias to put expected inflation on a path toward the target," IMF mission head Ulric Erickson von Allmen said in a statement.
Uruguay's central bank governor, Mario Bergara, said he is committed to price stability, and the bank raised its benchmark interest rate 25 basis points to 9 percent in September.
The IMF said the government should also consider other measures to tame runaway prices, such as moderating wage growth, and restraint in government spending. The Fund also said foreign exchange intervention may be warranted to avoid exchange rate volatility.
"Given surging capital inflows and attendant currency appreciation pressures, tight monetary policy cannot fight inflation alone," von Allmen said.
Inflation grew due to strong domestic demand and the recent spike in global food prices, among other factors. This year, Uruguay also had a surge in capital inflows, the IMF said.
Uruguay joined the coveted club of Latin American investment-grade countries in April when Standard & Poor's upgraded its credit rating, praising the leftist government's "prudent" economic policies.
The investment grade rating, as well as rate cuts in neighboring Brazil and overall global liquidity, contributed to the inflow of capital to the country. Those inflows fed into the currency's appreciation and higher prices.
The IMF praised the government's recent capital flow management measures, but said steps to cut or freeze some consumer prices would cause price distortions without addressing the root causes of inflation: mainly "extensive and hard-wired" wage indexation.
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