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Accelerating inflation poses a dilemma for central banks in Latin America: Moody’s Analytics

By on May 11, 2021 0

Rising inflation in several Latin American countries poses a dilemma for central banks, which will have to choose between curbing price increases and stimulating weak economies, according to Alfredo Coutino, director for Latin America at Moody’s Analytics.

In an interview with Xinhua, the head of regional economic research of the analytical arm of the credit rating agency noted that inflation is rebounding mainly in the largest economies in Latin America, such as Brazil, the Chile and Mexico, which are still battling the spread of COVID. 19.

“Latin American inflation, like in most emerging markets, has external and internal factors,” Coutino explained, listing recent increases in international food and oil prices as external influences.

“Domestically, there are disruptions in internal production processes caused by the persistence of the epidemic, which limits the supply of goods and services,” Coutino said.

Added to this mix is ​​the expansion of monetary conditions decided by several regional central banks following the escalation of the pandemic, which in turn affects the local exchange rate, the expert explained.

This situation, for example, pushed inflation above 6% in Brazil and Mexico, exceeding the target rates set by monetary entities, while in Peru, the consumer price index exceeded the 2% target.

Although in Chile the indicator is in the 3% target, it has been on an upward trend since the middle of last year, Coutino said.

“Now that inflation is becoming a risk, central banks face an apparent challenge: to continue to support the economy or to go back to fulfill their anti-inflationary function,” he said.

“If they fulfill their mandate, they have taken up the challenge, but they are jeopardizing the still weak economic recovery of their country,” he added.

Since 2020, most central banks in Latin America have focused their monetary policies on helping the economy to mitigate the impact of the pandemic on the region, most affected by COVID-19 in the world, has noted Coutino.

Interest rates are well below neutral rates in several countries in the region, while the real amount of money per unit of product is growing at a much faster rate than previously recorded.

This implies that the currency in circulation exceeds the quantity of goods and services produced by the economy, and that this excess results in higher prices or larger imports.

“In this sense, and in accordance with their mandate to control prices, the central banks of Latin America have no choice but to begin the process of reversing their expansive monetary cycle, not only by normalizing the rates of interest, but also by withdrawing the excess liquidity that they pumped into the economy, ”Coutino said.

“Unfortunately, Latin American central banks have fallen victim to their own single-goal monetary mandate (containing inflation), because in the face of rising inflation, they have to tighten monetary policy with the possible risk of ‘weaken or at least restrict the current economic recovery. ,” he added.

The pandemic caused Latin America’s economy to drop 7% in 2020, according to Moody’s Analytics.

For 2021, Coutino forecasts a regional economic rebound of 4.8%.
Source: Xinhua