Sep 3, 2021 - Economy

Latin America countries are worried about inflation

Illustration of a the earth as a balloon showing Latin America

Illustration: Sarah Grillo/Axios

Chile’s central bank became the latest in Latin America to hike interest rates this week, startling markets with a decision to double its overnight rate.

Why it matters: Inflation has been running high in parts of Latin America. And central bankers across the region don’t have the luxury of maintaining a “looser for longer” monetary policy the way the Fed and the ECB do.

  • That’s because many Latin American countries have a more traumatic past when it comes to runaway inflation — so they’re often quick to act on rising prices, Alonso Cervera, chief economist for Latin America at Credit Suisse, tells Axios.

What's happening: Chile’s central bank hiked its key rate to 1.5%, from 0.75% — and said it expects to keep on hiking all the way to 3.5% within the next six months.

  • This, after saying in June that rates would likely end the year at 1.25%.
  • Chile’s move was driven by expectations for inflation of 5.7% this year, and a forecast that 2021 GDP growth will heat up by as much as 11.5%.

The big picture: Mexico, Brazil and Peru have all raised rates in the last few months. And Colombia's central bankers have also hinted that they may need to begin a tightening policy.

  • Many of the recent rate-hikers don't have nearly the growth expectations of Chile — but are experiencing inflation, Cervera says.

What to watch: Besides the next round of inflation data and central bank meetings — upcoming elections.

  • That's because even as central banks seek to pull back from pandemic-era support, social spending demands on the part of the public may intensify — because COVID's impact on jobs and poverty has lingered, Michael Arno, associate portfolio manager at Brandywine Global, tells Axios.
  • The Chilean general election will take place in November, followed by Colombia in May and Brazil in October 2022, he notes.
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