The Observer – Montevideo
The Monetary Policy Committee, Copom, of the Central Bank, BCU, meets this Tuesday in a scenario marked by low local inflation and growing international volatility. After seven consecutive cuts in the Monetary Policy Rate, TPM, The market is beginning to wonder if the expansionary cycle has come to an end.
The context
As of March, interannual inflation stood at 2.94%, standing below the floor of the tolerance range set by the BCU of 3% to 6% and at the lowest level in the last 70 years.
Regarding expectations, analysts and the financial market maintain their projections anchored at 4.5% in the 24-month horizon, while businessmen place them around 5%, still above the center of the goal.
And the global environment has changed significantly due to tensions in the Middle East and the conflict with Iran. This situation has driven up energy and oil prices, introducing a scenario of high uncertainty.
In its latest communication, Copom acknowledged that the risks on inflation now look more balanced. Although the main risk remained that inflation would remain below the target, the impact of international prices could alter that assessment.
What’s coming
After the March cut, which left the MPR at 5.75%, the expansionary bias of monetary policy deepened. However, economist Aldo Lema warned that the Taylor Rule, a formula that estimates the appropriate level of the interest rate based on inflation and economic activity, currently indicates that the BCU should opt to maintain the reference rate, thus breaking the trend of constant declines.
In that sense, although the expansionary trend is maintained, financial operators no longer project new reductions in the rate. On the contrary, they expect it to remain stable in the short term and anticipate, in the medium term, an increase of 25 basis points for the beginning of the second half of this year, according to the expectations survey released last week.
Behind these projections is the idea that the current level of inflation will not be sustained, with a rebound expected in the coming months through two means: the monetary stimulus derived from the cuts in the Monetary Policy Rate and the rise in fuel prices due to the conflict in the Middle East and the rise in oil. This vision is already reflected in the local debt market, where the yields of Monetary Regulation Bills, LRM, have been increasing steadily.
In this context, This Tuesday’s meeting will be key to determining whether the BCU prioritizes the current inflation data, which is markedly low.or if you opt for a more cautious stance in the face of the complex international geopolitical scenario.
This local caution aligns with the concerns of multilateral organizations. According to the International Monetary Fund report of April 2026, lGlobal headline inflation has undergone upward revisions due to the conflict in the Middle East, now projected at 4.4% for 2026 and 3.7% for 2027. The outbreak of war has impacted raw materials markets and inflation expectations, adding to other pressure factors such as increased defense spending and possible shocks to energy prices.
In more serious scenarios, with persistent damage to the energy infrastructure, lGlobal inflation could rise to 5.4% in 2026 or even exceed 6% by 2027. Given this panorama, the organization recommends that central banks act decisively to prevent these supply shocks from destabilizing expectations.maintaining transparent communication and preserving its independence to ensure the credibility of monetary policy.
