Inflation risks growing

Inflation is at, or close to, multi-year highs across Latin America which has prompted a slew of interest rate hikes across the region. We think that central banks in Brazil, Mexico, Chile and Peru will continue their tightening cycles over the coming months, and that Colombia’s will soon join the club. However, in general, we expect that inflation across Latin America will fall in 2022 as temporary factors (base effects linked to fuel prices, re-opening effects, supply shortages) unwind, bringing tightening cycles to an end within a year or so. A key risk is if the current high rates of inflation cause expectations to drift higher, which may prompt central banks to press on the brakes more aggressively than we currently anticipate.
William Jackson Chief Emerging Markets Economist
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Latin America Economics Weekly

The fiscal risk of rising rates, Mercosur tariff cuts

Central banks were once again in the spotlight this week after the supersized 125bp rate hike in Chile, but one issue that is often overlooked is the damaging impact of rising interest rates on public finances across the region. Brazil is particularly vulnerable on this front, and may resort to financial repression over the medium term to alleviate debt risks. Otherwise, an agreement to cut Mercosur's common external tariff is a positive step towards liberalisation but, as always, domestic politics could be a hurdle for further progress.

15 October 2021

Latin America Economics Update

Brazil: signs of stagflation

The multitude of supply shocks hitting Brazil’s economy are likely to keep inflation at 7-10% well into next year and cause the pace of recovery to slow to a crawl in the next few quarters. Overall, we now expect GDP growth of just 1.3% next year, which sits below the consensus.

14 October 2021

Latin America Economics Update

Chile: front-loaded tightening cycle has further to run

The surprisingly large 125bp rate hike delivered by Chile’s central bank yesterday, to 2.75%, suggests that it will continue to front-load its tightening cycle to clamp down on high inflation. We now expect a further 225bp of hikes in this cycle, to 5.00%, by the end of Q1 2022 (previously 4.00%).

14 October 2021

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Emerging Markets Economics Chart Book

Asia bucks the monetary policy trend

Several EM central banks have continued to tighten monetary policy over the past month or so in response to strong reopening rebounds (Chile, Czech Republic, Hungary) and/or rising inflation concerns (Brazil, Mexico, Peru, Russia). A few others, including Colombia, are likely to follow suit relatively soon. But one EM region that is bucking the monetary policy trend is Asia. Admittedly, the Bank of Korea may be gearing up to tighten policy soon too in response to building financial risks. But the surge in virus cases and low (or easing) inflation means that most central banks in the region are in no rush to tighten. In fact, we now expect further rate cuts in both Thailand and the Philippines over the coming months, while the Reserve Bank of India is unlikely to start normalising policy until well into next year.

18 August 2021

Emerging Europe Data Response

Russia Consumer Prices (Jul.)

Although Russian headline inflation came in at a slightly-weaker-than expected 6.5% y/y, that masked a worryingly strong rise in core inflation that’s likely to trigger further monetary tightening. We still expect another 75bp of hikes in the policy rate (to 7.25%) over the coming months.

6 August 2021

Africa Economic Outlook

Lagging behind

Vaccination campaigns across Sub-Saharan Africa will continue to struggle, leaving the region vulnerable to renewed virus outbreaks. This, combined with tight fiscal policy, a slow return of tourists and falls in commodity prices means that economic recoveries will lag behind those in other parts of the world. GDP across most of the region is likely to stay well below its pre-crisis path over 2021-23.

5 August 2021
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