Uruguay's central bank marks five years without intervening in the currency market

The Central Bank of Uruguay marked its fifth anniversary of not intervening in the foreign exchange market on Monday. Its last operation was a purchase of $31.2 million in 2021. President Guillermo Tolosa described the milestone as "enormous" and highlighted the country's current period of "absolutely free floating of the currency."

He attributed the stability of the exchange rate to three key factors: Uruguay's economy exporting about $20 billion annually, the prohibition on the central bank financing the government, and an inflation-targeting regime. Tolosa linked the absence of intervention to stable inflation, which is currently at 4.3% against the target of 4.5%, without relying on reserves.

The central bank president emphasized that intervention in currency markets would only be used in specific instances of disruption or when the target is seriously at risk, with interest rate adjustments preferred as the first measure. He also warned of potential global downward pressure on the dollar due to US debt levels, which surpassed $40 trillion for the first time in August.

Recent weeks have seen selling of long-dated US bonds and the currency itself, which could lead to a significant appreciation of the Uruguayan peso, though this is not the bank's baseline scenario. Banks need to warn clients about the exchange rate risk associated with dollar accounts, with a plausible rate range of 40 to 44 or 45 pesos over several months, but not reaching 60 pesos.

The banking sector has questioned this measure, to which the regulator responded that lenders are comfortable with a status quo, earning the US policy rate around 4% and enjoying a wide intermediation margin. Uruguay's country risk premium stands at 62 basis points.