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As U.S. Federal Reserve policymakers engage in a lengthy discussion of the pros and cons of starting to withdraw their multibillion-dollar pandemic stimulus package, south of the border the debate is already over.
Inflation is back in force and central banks in Latin America are raising rates, some aggressively.
Leading the pack is Brazil, where the newly independent central bank is fighting to keep inflation from reaching double digits. “Brazil has really had a very big inflationary shock,” admitted central bank governor Roberto Campos Neto on September 1. Days later, figures were released showing annual headline inflation at a five-year high of 9.7% in August.
Brazil has already raised its benchmark interest rate four times since March to 5.25% and investors expect another increase of at least 1 percentage point this month, with more to follow.
Inflation is particularly alarming in Latin America due to the region’s long history of price instability, particularly in the 1970s and 1980s. Newly empowered central banks have brought prices under control in most major economies over the years. decades, but the region has never fully exorcised its inflationary demons.
Venezuela has experienced the world’s worst inflation of 5,500% in 2020 and prices in Argentina rise more than 50% a year as the central bank happily prints money to finance a deficit – another bad old Latin habit -american.
In Mexico, base prices rose last month to their highest rate since 1999 and Citibank expects 6.1% inflation for 2021. Although the central bank has never cut rates as aggressively as peers during the pandemic, it has tightened its policy twice this year and Citi expects two more hikes before the end of the year, taking the key rate to 5%.
The same story is repeated along the Andes. Annual inflation in Chile reached 4.8 percent in August, almost double the level in February. The central bank released a hawkish inflation report, signaling further tightening after doubling rates last month. In neighboring Peru, inflation hit 4.95 percent in August and the central bank began to tighten while in Colombia, prices rose 4.4 percent a year in August.
“The picture is getting worse by the day with the rapid spread of inflationary pressures,” said Alberto Ramos, head of the Latin American economy at Goldman Sachs. “It will probably take a lot of political tightening to put the inflation genius back in the spotlight.”
Latin America has been hit harder by the combined health and economic impact of the coronavirus than any other region. Rapidly rising interest rates now threaten to stifle a recovery that was already running out of steam with the end of government stimulus programs and the price cap on commodity exports. JPMorgan expects the region’s 6.4% growth this year to slow to just 2.4% next year.
“Central banks in the region have no choice,” said Ernesto Revilla, head of Latin America’s economy at Citibank. “They must tighten their monetary policy despite a weak economy because they cannot let inflation expectations drift. It is the curse of the central banks of emerging markets ”.
Latin American policymakers are casting envious eyes on the United States, where the Fed has so far been able to continue its multibillion-dollar economic stimulus despite inflation peaking in 13 years in July.
“The Fed can continue to say that inflation is transitory and that there is no need to overreact,” said Claudio Irigoyen, head of Latin America’s economy at Bank of America. “Ultimately, it will pay a price, but the reality is that the world is paying in dollars. . . Latin American central banks don’t have the luxury of saying ‘this is a temporary change in inflation’ ”.
The growing threat of inflation precedes an electoral cycle that will see new presidents elected in Chile, Colombia and Brazil over the next 13 months, while Peru and Ecuador chose new leaders earlier this year. Voters are expressing their anger at the pandemic missteps of incumbents and favoring radical outsiders, a dynamic that bodes badly for central banks.
The Banco de Mexico rate hikes have already sparked a political row with populist President Andrés Manuel López Obrador. “Although Banco de Mexico should pay attention to inflation and growth. . . for a long time they only cared about inflation, ”he said at his morning press conference last month.
Irigoyen said he saw “a decent chance” of further radicalization in the next election. “This will create a lot of pressure on currencies and demand for high spending, which will put pressure on central banks,” he added. “In the United States, more and more people are arguing that the Fed should accommodate budget deficits. People in Latin America will say, “If they can do it, why can’t we? “
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