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Latin America


Petro reaction, Lula’s plans, hawkish central banks

Gustavo Petro’s win in Colombia’s presidential election has caused tremors in the country’s financial markets. While the appointment of a centrist finance minister could help to settle investors’ nerves, the global backdrop is turning increasingly unfavourable. In Brazil, Lula, the front-runner in the race for the presidency, unveiled policy plans that will, likewise, probably unnerve investors around the election there in October. Finally, the week was marked by further hawkish noises from central banks in the region. We’ve revised up our interest rate profile in Brazil and the upside risks to our interest rate forecast in Mexico are growing.

24 June 2022

Banxico’s tightening cycle shifts up a gear

The Mexican central bank’s shift to a 75bp interest rate hike yesterday (to 7.75%) and the hawkish language in the accompanying statement make another 75bp move at the next meeting in August a done deal. And the risks to our end-2022 interest rate forecast of 9.50%, which is already higher than most expect, are now skewed to the upside.

24 June 2022

Mexico Bi-Weekly CPI (June)

The stronger-than-expected rise in inflation to 7.9% in the first two weeks of June adds to the pressure on Banxico to fight stubbornly strong price pressures. We think Banxico will step up the pace of tightening at its meeting later today with a 75bp hike in the policy rate, to 7.75%.

23 June 2022
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Banxico outlook, Brazil GDP, Colombia election

Given the Fed’s hawkish shift and the recent sell-off in the Mexican peso, we now think that Banxico will step up the pace of tightening with a 75bp rate hike next week, to 7.75%. Elsewhere, in Brazil, the recently-released activity and survey data have prompted us to revise up our already above-consensus 2022 GDP growth forecast, to 2.0% (from 1.3%). Finally, Colombia’s presidential election on Sunday between left-wing Gustavo Petro and populist Rodolfo Hernández on Sunday looks too close to call. One key point is that neither candidate seems committed to tighten fiscal policy to reduce medium-term public debt risks. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now  

Argentina’s IMF review, Mexican industry recovering

This week's staff-level agreement between the IMF and Argentina, for the first review of its $44bn deal, gave little assurance that the Fund will knuckle down on the country’s growing inflation and currency issues. Elsewhere, the stronger-than-expected 0.6% m/m rise in Mexico’s industrial production in April provides some positive signs that the sector is back on the road to recovery, but ongoing headwinds will prevent a major rebound. Accordingly, we still expect mediocre GDP growth of less than 2% in Mexico this year.

Mexico Consumer Prices (May)

Mexico’s inflation rate stabilised at 7.7% y/y in May and we expect that it will trend lower in the coming months. This may temper some of the hawkish sentiment at Banxico. We think that it will stick to the current pace of tightening and deliver another 50bp rate hike, to 7.50%, at its meeting later this month.

Colombia: no more business as usual

The first round of Colombia’s presidential election has set up a close race between left-wing Gustavo Petro and populist Rodolfo Hernández in the second round vote on 19th June. The vote was a major repudiation of the pro-business governments that have governed Colombia for the past two decades. Investors seem to have welcomed the result. Hernández is seen as having the best chance of defeating Petro and avoiding a shift to the left. But we think that any optimism is likely to be short lived. Neither Hernández nor Petro are likely to tighten fiscal policy to reduce public debt risks, while both advocate higher trade barriers which bodes poorly for Colombia’s growth prospects. If anything, we suspect that Hernández presents a greater risk on these fronts than Petro.

Petrobras debacle, Banxico minutes, Colombia votes

The news this week that Brazil’s President Bolsonaro sacked the CEO of oil giant Petrobras, José Mauro Coelho, provides a worrying sign about the direction of policymaking in the run-up to October’s elections. Elsewhere, while the minutes to Banxico’s last meeting showed that most Board members were seriously considering a 75bp move (compared to the 50bp delivered), we suspect that Banxico will stick to the current pace of tightening in the near term. Finally, we published a Focus and held a Drop In looking at the implications of Colombia’s presidential election on Sunday.

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