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.
Nikhil Sanghani Emerging Markets Economist
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Latin America Data Response

Brazil Industrial Production (Oct.)

The surprise 0.6% m/m fall in Brazilian industrial production in October and weakness in the surveys for last month provide early evidence that the contraction in the economy last quarter may be followed by another q/q drop in GDP in Q4.

3 December 2021

Latin America Data Response

Brazil GDP (Q3 2021)

The 0.1% q/q fall in Brazilian GDP in Q3 confirmed that problems in the agricultural and industrial sectors tipped the economy into a technical recession. And with financial conditions tightening, the terms of trade worsening, and the threat from the new Omicron variant, the risks to our GDP growth forecast for next year of 1.3% are skewed firmly to the downside. Copom may temper its hawkish sentiment a bit at its meeting next week, with a 150bp hike (rather than 175bp) now looking more likely.

2 December 2021

Latin America Economics Update

Red-hot Chile set to cool

Chile’s economy has been operating above potential for several months but there are signs that activity is starting to cool. And policy tightening, falls in copper prices and the possibility of more stringent virus restrictions in light of the Omicron variant mean that growth will slow sharply over the coming quarters.

1 December 2021

More from Nikhil Sanghani

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

Latin America Data Response

Mexico Industrial Production (Aug.)

The stronger-than-expected 0.4% m/m rise in Mexico’s industrial production in August suggests that the economy may have held up better than we had previously anticipated in Q3. But, under the surface, there are still clear signs of weakness in the key auto sector which are likely to persist in the coming months, keeping a lid on the overall economic recovery.

12 October 2021

Latin America Economics Weekly

Castillo moderates, Amlo’s intervention & ailing autos

President Castillo’s cabinet reshuffle in Peru this week points towards more pragmatic policymaking which, while a possible headwind to near-term growth, should boost Peru’s medium- to long-term economic prospects. On the flipside, Mexico's President López Obrador (Amlo) is once again trying to increase his grip on the energy sector which may deter private investment and weigh on the economy there. Finally, the latest data suggest that global shortages are continuing to hit auto production while also adding to price pressures across the region, and this trend may have further to run.

8 October 2021
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