Trapped in the impossible trinity

Policymakers in Latin America face an awkward choice. Either they must fight inflation with stronger currencies but at the expense of a squeeze on domestic manufacturers, or they can limit currency appreciation but at the risk of higher inflation over the next year or so. We expect most to adopt a middle ground. Accordingly, interest rates will be hiked in most countries, but by less than the market currently expects. Meanwhile, inflation and bubbles will remain a nagging threat. Mexico is the happy exception to all of this.