Inflation rises in Latin America and so will interest rates

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March inflation exceeded even the most pessimistic forecasts in Brazil and Chile, according to official figures published on Friday. That follows worse-than-expected price data in Colombia, Peru and Mexico. The region is being hit by rising fuel and food costs caused by the Russian invasion of Ukraine.

Latin American monetary authorities were among the first in the world to start raising borrowing costs as global supply constraints and, in some countries, anti-pandemic stimulus reignited inflation. New price pressures are now challenging Chile and Brazil’s plans to complete the adjustment. They also risk fueling social unrest, which has erupted in the form of mass protests in Peru.

Also read: Inflation does not yield and reached 8.53% in March

In Colombia, inflation has had the following behavior:

The Regional Landscape

“Food and fuel prices were the main, but not the only, drivers of the sharp increases in March. The results clearly show the impact of the increase in world food and fuel prices after the war in Ukraine. They also show increasing pressure on inflation in general. The data points to a challenging scenario for central banks, since inflationary pressure is mainly due to supply shocks in which interest rates do not have much effect,” said Felipe Hernández, an economist at Bloomberg Economics.

Brazil’s monthly inflation posted its biggest increase since 2003 as gasoline soared 6.95%. Chile’s consumer prices posted the biggest monthly rise in roughly three decades, as bread rose 5.9% and energy jumped 2.6%.

Also read: Producing more with less: the challenge of Latin America in a world in crisis

Cooking gas and gasoline fueled inflation in Mexico, with the annual figure hitting a 21-year high. Still, the price increases could have been much worse.

“Gas and gasoline prices have risen much less than international reference indicators,” Alonso Cervera, chief Latin America economist at Credit Suisse Group AG, said of Mexico. “Inflation would be higher, much higher, if it weren’t for the subsidies.”

Challenge to projections

March inflation tests the projection of the president of the Central Bank of Chile, Rosanna Costa, who said last week that those in charge of monetary policy could slow down the pace of future rate hikes. The same goes for guidelines from Brazil’s central bank president Roberto Campos Neto, who has repeatedly signaled his plans for a final rate hike in May. Swap rates in both countries rose on Friday after the price figures.

To be sure, some economists are wary of the idea of ​​even more aggressive increases in the cost of borrowing. “Instead of looking at current headline inflation, they’re looking at 12-24 month inflation. That is what really matters to them,” said Alejandro Arreaza, an economist at Barclays Capital Inc.

Also read: The Bank of the Republic continues to play hard: it raised its rates to 5%

There are increasing signs that the price malaise is spilling over into politics. Peru’s President Pedro Castillo decided to impose a curfew in Lima this week after anti-inflation protests turned into violent clashes with police.

In Brazil, state-owned Petróleo Brasileiro SA, or Petrobras, announced in March that it would raise fuel prices by up to 25%. The nation’s president, Jair Bolsonaro, who is up for re-election in October, ousted the company’s chief executive two weeks later as polls showed voters’ discontent with inflation.

In Colombia, the increases in interest rates have been given in this way:

Similarly, about two-thirds of Chileans believe the outlook for consumption is bad or very bad, according to a public opinion poll released on Sunday, which also showed President Gabriel Boric’s approval rating slipping.

On Thursday, Boric unveiled an economic plan aimed at boosting sectors that have been left behind in the nation’s recovery. The initiative includes freezing public transport prices, as well as efforts to contain increases in kerosene and gasoline.

Looking ahead, there is more bad news in the offing. On April 13, Argentina will publish its inflation reading for March, which is expected to show a 5.8% increase in consumer prices, which would be the largest increase recorded during the presidency of Alberto Fernández.

“The war in Ukraine and the massive volatility in commodity prices are a surprise to everyone,” said William Jackson, chief emerging markets economist at Capital Economics. “More than anything, it puts the monetary authorities in a difficult position, given that they have already acted to contain the increase in prices.”

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