Inflation in Latin America is anchored but risks persist: IMF

NEW YORK, Jan 31 (Reuters) – Inflation accelerated to the fastest pace in 15 years in some of Latin America’s biggest economies in 2021, but credible monetary policies have kept long-term price rise expectations anchored, the International Monetary Fund (IMF) said on Monday.

Brazil, Chile, Colombia, Mexico and Peru posted an 8.3% price increase in 2021, the biggest increase in 15 years and a rate higher than readings for other emerging markets, the IMF said.

Argentina, another large economy in the region, saw inflation rise above 50% last year.

Aside from rising import and commodity prices, the IMF said, weak currencies and pent-up consumer demand, built-in increases that are adjusted for inflation have pushed prices up even higher in some cases in the region.

But in Brazil, Chile, Colombia, Mexico and Peru, central banks have gained credibility as benchmark interest rates rose between 1.25 and 7.25 percentage points last year. The tightening of monetary policies, along with forward guidance, have helped keep inflation expectations anchored, the agency said.

“Long-term inflation expectations remain relatively well anchored, reflecting confidence in monetary policy to bring inflation back on target. However, short-term inflation expectations are elevated, suggesting a need for ongoing surveillance,” the IMF said.

Tighter monetary policy in the United States, which generally increases pressure on Latin America and other emerging markets, is another variable the region must take into account.

“The authorities could prepare for the tightening of US monetary policy by extending the maturities of public debt, reducing the needs for fiscal renewal and limiting the accumulation of currency depreciations in the balance sheets of the financial sector when possible,” said the IMF.

SOCIAL TENSIONS

Price pressures coupled with a busy electoral calendar this year and a slowdown in growth remain factors that carry high risks of social unrest in the region.

“The pandemic came after a year of widespread social upheaval in the region, which had accumulated during the years of economic stagnation that followed the end of the commodity boom. With a heavy electoral calendar in the offing, the social issue remains a significant risk and inequality will need to be reduced and addressed,” the IMF said.

Brazil, Colombia and Costa Rica will elect presidents this year while referendums and local elections are expected in Chile, Uruguay, Mexico and Peru.

Last week, the IMF lowered its GDP growth expectation for 2022 in Latin America and the Caribbean by 0.6 percentage points to 2.4% for this year, after an estimated rebound of 6.8% in 2021.

The Fund cited slower growth in China and the United States, logistical bottlenecks and the emergence of the omicron variant of the coronavirus as arguments for downgrading Latin American forecasts.

The cut leaves the region facing what the IMF sees as three major challenges: ensuring the sustainability of public finances, raising potential growth, and doing so in a way that promotes social cohesion and addresses social inequalities.

“Addressing these challenges, which began even before the pandemic, will take time. The authorities should start now to develop a comprehensive strategy to deal with them and create a social consensus around this strategy,” the Fund said.

(Reporting by Rodrigo Campos. Editing in Spanish by Marion Giraldo)

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