Latin America


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

Peru: BCRP stepping up pace of tightening

Yesterday’s larger 50bp rate hike, to 1.00%, delivered by Peru’s central bank (BCRP) suggests it is becoming increasingly concerned about the inflation outlook. With inflation set to stay above the 1-3% target range over the coming quarters, and GDP growth likely to beat expectations, we now think that the policy rate will rise to 2.00% by end-2021 and 3.50% by end-2022 (previously 1.25% and 2.75%).

10 September 2021

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.

19 August 2021
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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.

Peru & Mexico hikes, Chile’s public spending spree

Peru’s central bank, under the renewed stewardship of Governor Julio Velarde, started its tightening cycle yesterday with a 25bp rate hike, to 0.50%, and we think that rates will rise to 2.75% by the middle of next year. Elsewhere, there was another split vote as Mexico's central bank also hiked its policy rate by 25bp (to 4.50%) and we think its tightening cycle will end sooner than most investors currently expect. Finally, the fresh fiscal stimulus announced by Chile's government will give a boost to the economic recovery, but it is another worrying sign of a shift away from pragmatic policymaking.

What our commodity forecasts mean for Latin America

We expect that most commodity prices will come off the boil, which will weigh on recoveries across Latin America, particularly in Peru and Chile. While the brightening domestic picture will boost overall GDP growth in the very near term, this emerging headwind to activity adds to the reasons why we expect that the regional recovery will lag much of the rest of the world over the coming quarters.

Chile GDP, central bank hawks, Brazil’s meteor

This week’s strong activity data from Chile reaffirms our long-held optimism over its economic recovery, and will probably cause the central bank to adopt a more hawkish stance. Other central banks in the region are also heading in this direction, most notably in Brazil but also those in Mexico, Colombia and Peru. Finally, court ordered payments owed by Brazil's government (which Economy Minister Paulo Guedes said will hit the budget like a "meteor") have put attention back onto the country’s fiscal health, and concerns are likely to build ahead of next year’s election.

The economic fallout from political risks in Lat Am

The pandemic appears to be accelerating a political trend towards populism in Latin America. While there is a lot of uncertainty about how this might play out, it generally points towards loose fiscal policy and greater state intervention across the region. The key economic risks are that this could lead to weaker public finances, lower potential growth and possibly higher inflation over the medium term. The more immediate impact will probably be to keep Latin American financial markets under pressure.

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