Inflationary shocks in Latam raise the prospect of more rate hikes

Latin American central bankers face renewed pressure to extend aggressive interest rate hikes after consumer prices beat estimates across the region, fueled by rising commodity costs.

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 affected by rising fuel and food costs caused by Russia’s invasion of Ukraine.

Central bankers in Latin America 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.

What Bloomberg Economics Says

“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, as inflationary pressure is mainly due to supply shocks in which interest rates do not have much effect.”.

-Felipe Hernandez, Latin American economist

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

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 benchmarks,” Alonso Cervera, chief Latin America economist at Credit Suisse Group AG, said of Mexico. “Inflation would be a lot higher, I mean a lot, if it weren’t for the subsidies.”

Challenged orientation

March’s inflation tests the forecasts of Chile’s central bank president Rosanna Costa, who said last week that policymakers will be able to slow the pace of future rate hikes, and Chile’s central bank president Brazil, Roberto Campos Neto, who has repeatedly signaled plans for a final increase in May. Swap rates in both countries rose on Friday following the price figures.

To be sure, some economists are wary of the idea of ​​even more aggressive increases in borrowing costs. “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.

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, state-owned Petroleo Brasileiro SA, or Petrobras, announced in March that it would raise fuel prices by up to 25%. President Jair Bolsonaro, who is up for reelection in October, ousted the company boss two weeks later when polls showed voters furious about inflation.

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 that also showed a drop in President Gabriel Boric’s approval rating.

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 increases in public transport, as well as efforts to contain increases in kerosene and gasoline.

In the future, there is more bad news in sight. On April 13, Argentina will publish its inflation reading for March, which is expected to show a rise in consumer prices of 5.8%, the biggest jump during the term of President Alberto Fernández.

“The war in Ukraine and the massive volatility in commodity prices is a surprise to everyone,” said William Jackson, chief emerging markets economist at Capital Economics. “More than anything, it puts policymakers in a difficult position, since they have already acted to contain price increases.”

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