Navigating Uncertainty: BCU’s Dual-Scenario Approach

The central Bank of Uruguay (BCU) is proactively addressing the current climate of global economic uncertainty by developing two distinct macroeconomic scenarios. This strategic approach, detailed in thier recent Monetary Policy Report for the first quarter of 2025, aims to prepare the nation’s economy for potential challenges arising from escalating geopolitical tensions and fluctuating international trade policies.

The report highlights a growing concern regarding the dynamism of global economic activity, citing the ongoing marches and countermarches related to tariff impositions and retaliatory measures as key factors contributing to this uncertainty. This complex interplay of trade policies is creating a volatile habitat that necessitates careful planning and adaptability.

Two paths Diverge: Trade Tensions and Economic Impact

The BCU’s analysis hinges on two potential trajectories for global trade relations:

• Scenario 1: De-escalation of Trade Tensions: This optimistic scenario assumes a gradual reduction in global trade tensions, leading to a more stable and predictable economic environment.
• Scenario 2: Intensified and Persistent Trade Conflicts: This more pessimistic outlook anticipates a continuation and intensification of trade disputes, resulting in depressed global activity and increased volatility in financial markets.

Regardless of which scenario unfolds, the Central Bank anticipates a slowdown in Uruguay’s economic growth during the latter half of 2025. This cautious outlook reflects the interconnectedness of the global economy and the potential impact of external factors on domestic performance.

Growth Projections and the Role of Private Spending

Even with the anticipated slowdown, the BCU projects that the Uruguayan economy will experience average growth of around 2.5% in 2025 under a scenario of high commercial tensions. However, the report suggests a further deceleration in 2026, with growth eventually aligning with its long-term trend by 2027.

According to the BCU, the main growth engine would continue to be private spending. This underscores the importance of consumer confidence and investment in driving economic activity during this period of uncertainty. Current data indicates that private spending accounts for approximately 60% of Uruguay’s GDP, making it a critical factor in the nation’s economic performance.

Inflation management and Monetary Policy

The BCU remains confident in its ability to manage inflation within the target range,regardless of the prevailing global economic scenario. The report indicates that interannual inflation would evolve within the tolerance range throughout the HPM [horizonte de política monetaria], with a path that approaches the target faster than in the past.

The bank emphasizes its commitment to closely monitoring the macroeconomic context and adjusting monetary policy as needed. This proactive approach aims to ensure price stability and support lasting economic growth.

The BCU outlines two distinct monetary policy responses based on the two scenarios:

• Benign Scenario (Reduced Trade Tensions): In this case, the BCU believes that the inflation target can be achieved without significant monetary policy intervention.This could potentially lead to a downward path for the monetary policy rate.
• Adverse Scenario (intensified Trade Tensions): Conversely, heightened trade tensions and financial market volatility would likely necessitate a contractive monetary policy to address inflationary pressures. this would involve tightening monetary conditions to curb inflation and maintain economic stability.

Looking Ahead: Vigilance and Adaptability

The Central Bank of Uruguay’s dual-scenario approach reflects a prudent and proactive strategy for navigating the complexities of the global economic landscape. By carefully monitoring key indicators and remaining prepared to adjust monetary policy as needed, the BCU aims to safeguard the nation’s economy from potential shocks and ensure sustainable growth in the years ahead. The focus remains on balancing growth with inflation control, a delicate act in the face of global uncertainty.