Uruguay must act to tackle 9.1 pct inflation -IMF
* Central bank raised raised rates to 9 pct in September
* Target inflation range is 4 to 6 percent
WASHINGTON Dec 14 (Reuters) - Uruguay must do more to tamp down inflation, which climbed to 9.1 percent in October, to give the government more freedom to respond to any future economic downturn, the International Monetary Fund's board said on Friday.
The IMF's executive directors endorsed the views of Fund staff, who said in November inflation must be the government's top economic priority.
Uruguay's central bank last raised rates in September to 9 percent, the highest level in at least two years, but inflation remains above the government's 4 to 6 percent target range, the IMF said in its annual health check of the economy.
The IMF said Uruguay's central bank should better communicate where its policies are headed, and how it would respond to shocks.
"More frequent policy meetings would also be useful," the Fund said.
The directors also called on the government to tools other than interest rates to fight inflation, including cutting back on government spending and moderating wage growth.
The small South American country has been caught between competing policy priorities: inflation continues to creep up, but hiking rates higher might increase already strong capital flows into the country, which risks pushing up Uruguay's currency.
"Short-term capital inflows are presenting monetary policy with difficult choices between lowering inflation and avoiding a sharp (currency) appreciation," the IMF said.
But the peso remains in line with its fundamental rate for now, meaning inflation is the key risk, the Fund said.
The Fund also said Uruguay's growth has been slowing toward its long-run potential, and faced risks from slower economic growth in neighboring countries.
Uruguay's economy is expected to grow 4 percent this year and next according to official forecasts. But some analysts think sluggish growth in larger neighbors Brazil and Argentina could take a bigger toll than the government is predicting.
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