Inflationary shocks in LatAm increase probability of more rate hikes

Bloomberg— Central banks in Latin America face renewed pressure to extend aggressive interest rate hikes after consumer prices beat estimates across the regiondriven by rising raw material costs.

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

Latin American central banks were among the first in the world to start raising borrowing costs as global supply constraints and, in some countries, COVID-19 stimulus reignited inflation. New price pressures now defy plans by Chile and Brazil to end monetary tightening. They also risk fueling social unrest, which has erupted in the form of mass protests in Peru..

What Bloomberg Economics Says

“Food and fuel prices were the main, but not the only, drivers of the sharp rises 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 the growing pressure on inflation in general. The data points to a difficult scenario for central banks, since inflationary pressure is mainly due to supply shocks on which interest rates do not have much effect.”

Felipe Hernández, economist for Latin America

Brazil’s monthly inflation was the highest since 2003, as gasoline soared by 6.95%. In Chile, consumer prices posted the biggest monthly rise in almost three decades, after bread rose 5.9% and energy 2.6%.

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

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

Challenge to projections

March inflation puts to the test the projections of the president of the central bank of Chile, Rosanna Costa, who said lLast week that policymakers will be able to slow the pace of future rate hikes, and from Brazil’s central bank president Roberto Campos Neto, who has repeatedly signaled that he plans a final increase in May. Swap rates in both countries rose on Friday after the inflation figures.

Undoubtedly, some economists are wary of the idea of ​​an even more aggressive rise in borrowing costs. “Instead of looking at current headline inflation, they look at inflation 12-24 months ahead. That is what really matters to them,” said Alejandro Arreaza, economist at Barclays Capital Inc. (BCS).

There are growing signs that price anger 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, the state company Petroleo Brasileiro SA (PBR), or Petrobras, announced in March that it would raise fuel prices by up to 25%. President Jair Bolsonaro, who will stand for re-election in Octoberfired the company boss two weeks later, when polls showed voters were furious about inflation.

Similarly, approximately two-thirds of Chileans believe that 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 declining.

On Thursday, Boric unveiled an economic plan aimed at boosting sectors that have lagged behind in the country’s recovery.. The initiative includes the freezing of increases in public transport, 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 March inflation reading, which is expected to show a consumer price increase of 5.8%the biggest jump during the mandate of the president, Alberto Fernández.

“The war in Ukraine and the huge volatility in commodity prices is a surprise to everyone,” said William Jackson, chief emerging markets economist at Capital Economics. “More than anything, it puts policy makers in a difficult position, as they have acted to contain rising prices.”

With the assistance of Rafael Gayol.

This article was translated by Andrea González

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