Uruguay

At the request of the Central Bank of Uruguay (BCU), IMF technical assistance (TA) supported the authorities in strengthening monetary policy implementation and liquidity management under BCU’s inflation targeting framework. The work assessed how policy rate decisions transmit to overnight Uruguayan peso rates, central bank bill yields, deposit rates, and lending rates, and examined the role of term premia, liquidity conditions, and market depth in shaping the domestic currency yield curve. The engagement combined empirical analysis of money market rates, central bank bill auctions, liquidity conditions, reserve requirements, and pass-through dynamics with structured discussions with banks and other market participants. The analysis found that the BCU has achieved strong control of overnight peso rates, but that implementation remains operationally intensive in a shallow and highly dollarized financial system, where structural liquidity surplus, limited interbank activity, and frequent central bank fine-tuning operations constrain price discovery and the development of domestic currency money markets. The TA proposed a more predictable and market-oriented operating framework to deepen Uruguayan peso money markets and strengthen monetary transmission. Key recommendations included introducing a weekly fixed-rate full allotment seven-day operation at the policy rate, recalibrating the interest rate corridor, strengthening peso reserve requirement design and remuneration, modernizing liquidity forecasting, concentrating central bank bill issuance in standard maturities, improving auction transparency, and reinforcing institutional capacity for monetary operations and market development.