What is a Monetary Policy?
One of the main targets of the Central Bank is price stability, in order to preserve currency value, that is, the purchasing power of the Uruguayan peso. To achieve this, our institution implements an inflation target regime through which it undertakes to make every necessary effort to keep inflation within the target range established by the Macroeconomic Coordination Committee.
A stable currency contributes, among other things, to production growth, economic and social development, job creation, and to maintain the value of the citizens' income. A low inflation environment enables economic agents to predict the future with less uncertainty and make better economic and financial decisions (savings, investments, consumption, etc.). High inflation translates into a “tax” on society that negatively affects mainly those who cannot “defend themselves”, thus generating more social inequity.
Monetary policy refers to the set of actions led by the Central Bank of Uruguay aimed at achieving inflation goals. The main decisions in this matter are made by the Board of Directors of the Central Bank of Uruguay through the Monetary Policy Committee (COPOM in Spanish) in coordination with the Macroeconomic Coordination Committee.
How does the Monetary Policy work?
The current monetary policy in Uruguay can be defined as an inflation target scheme based on monetary aggregates. In this monetary arrangement, the main reference variables are the means of payment, defined as the extended aggregate M1 (currency outside banks + sight deposits + savings accounts). The monetary policy seeks that this aggregate grows in a way that is consistent with the inflation target and with money demand.
By way of example, if inflation is above target, the monetary policy shall reduce the aggregates' growth rate. This reduction will, through different means, restrict private expenditure in the goods and services markets, which should mitigate the pressure on overall price increase.
However, and very important also, is the impact of these measures on future inflation expectations of the economic agents who effectively participate in the pricing process. Therefore, in order for the monetary policy to work efficiently, the actions defined by the Central Bank must be clear in order for the economic agents to understand the aims of the Central Bank's Monetary Policy.