Latin America

Chile

Is high inflation here to stay in Latin America?

Following a surge in inflation across the region this year, we think that headline rates are at, or close to, a peak in major Latin American economies. But strong underlying price pressures will prevent inflation from falling below central banks’ targets over the next year or so. Monetary tightening cycles therefore have a lot further to run across the region, especially compared to elsewhere in the emerging world.

15 September 2021

Dollar rebound looks unconvincing

After weakening over the preceding two weeks, the US dollar has rebounded against most other currencies this week. Nonetheless, last week’s disappointing payrolls report and the slightly less upbeat tone in recent comments from FOMC members appear to have kept a lid on the greenback. We think an announcement on tapering asset purchases will now not be forthcoming at the September FOMC meeting later this month. But with new economic forecasts and the addition of 2024 projections to the “dot plot”, that meeting may still set the tone for the dollar for the next couple of months. A repeat of the hawkish surprise at the June meeting (which was in part driven by upward revisions to the “dot” rate projections) could well revive the dollar rally.

10 September 2021

The pandemic and EM scarring risks

The pandemic is likely to inflict lasting damage on potential growth in economies in much of Latin America, Africa and South and Southeast Asia, adding to the structural headwinds that they already faced. However, the risk of permanent scarring in many other emerging markets – including much of East Asia and Emerging Europe – is overstated.

9 September 2021
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Chile Consumer Prices (Aug.)

The further rise in Chile’s inflation to 4.8% y/y in August suggests that the central bank’s tightening cycle has a lot further to run. We expect a further 100bp of rate hikes, to 2.50%, by end-2021 but, given the concerning inflation outlook, the risks are skewed towards more aggressive tightening.

8 September 2021

Brazil’s recovery worries, hawks fly in Chile

The disappointing economic data out of Brazil this week has cast some clouds over the economy’s recovery prospects. As it happens, we think that GDP growth will pick up quite strongly in Q3, but we’re increasingly concerned that electricity constraints could put the brakes on the recovery later in the year. Elsewhere, Chile’s central bank became the latest in the region to spring a hawkish surprise and we think the policy rate will be raised further that the central bank’s new guidance implies.

Chile’s central bank stepping on the brakes

The surprise 75bp interest rate hike by Chile’s central bank late on Tuesday (which took the policy rate to 1.50%) underscores policymakers’ concerns about the inflation outlook. Our forecasts for the policy rate had in any case been on the hawkish side, but we have revised up our end-21 forecast to 2.50% (from 1.50%) and our end-22 forecast to 4.00% (from 3.25%).

Brazil at breaking point, Argentina’s SDRs, Chile pensions

Brazil’s institutional crisis took a turn for the worse this week, and points to an environment in which fiscal risks will grow and the economic reform agenda will be put on the backburner. Elsewhere, a proposed fourth pension withdrawal bill in Chile would turbocharge the economic recovery, but adds to reasons to expect aggressive monetary tightening and presents longer-term public debt risks. Finally, while the IMF’s SDR allocation has given policymakers in Argentina some breathing space, they appear no closer to securing a new deal with the Fund.

Em. Europe & Lat Am leading the recovery in Q3

Most economies in Emerging Europe and Latin America look set for a strong third quarter and, while the near-term outlook for Southeast Asian economies remains challenging, high-frequency mobility provide early signs that at least parts of the region are over the worst.

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