In Latin America, hawks sit at the central bank levers

Inflation rates in Latin America are also through the roof. But unlike the rest of the world, the peak seems to have been reached here. This is mainly due to the rapid reactions of the central banks last year. The monetary guardians are reacting so quickly because inflation fears are still omnipresent in South America.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

As here, inflation rates in Latin America have also risen rapidly in recent months: This applies not only to Argentina, where inflation will be well over 70 percent by the end of the year. There, government spending is increasingly being financed with the printing press.

But even the more stable economies – especially those in the Andean countries – are experiencing rapid inflation rates: In Peru, Chile and Colombia, food and energy prices are rising at a rate not seen in decades. Investment banks are also revising inflation forecasts in Brazil and Mexico.

Nevertheless, it is surprising that inflation expectations for the end of 2022 are in single digits in almost all countries – with the exception of Argentina and Venezuela. The financial services provider Oxford Economics estimates that inflation rates in Latin America have currently peaked. That would be far earlier than in Europe or the USA, for example.

The reason: Central banks in Latin America began raising interest rates as early as the middle of last year in order to curb inflation rates.

It seems that in Latin America, the still present experience of inflation or even hyperinflation in the past decades ensures that monetary policy hawks sit at the central banks’ levers. The monetary guardians in Latin America are quicker to slam on the brakes than those in Europe or the USA when inflation rates rise.

By way of comparison, the last period of high inflation was in the USA more than 40 years ago. In Latin America, by contrast, inflation is an everyday occurrence. Argentina has experienced only two years with inflation below 10 percent since 2002. In Buenos Aires, it is evident how unsuccessful governments are that do not succeed in curbing monetary devaluation. In Brazil, Chile and Peru, too, periods of high inflation and their negative consequences for society, the economy and politics are still deeply anchored in the consciousness of the population.

But the early and severe countermeasures taken by the monetary guardians have come at a price: high interest rates are putting the brakes on growth. The investment bank JP Morgan hardly expects any more key interest rate hikes this year. But experts fear that central banks will have to maintain their tough monetary stance until 2023.

As a result, growth in Latin America will also be weaker next year – and may even shrink by half compared with 2022 (1.3 percent instead of 2.1 percent), according to JP Morgan. Large economies such as Brazil (-0.2 percent) and Mexico (1.5 percent) will grow even less next year than in 2022, but even the economies with the highest growth rates, such as Colombia and Peru, will only grow by 2.5 percent.

Brazilian Real
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