Bogotá — Moody’s Analytics sees inflation as having begun a downward cycle in most of Latin America, with Argentina and Venezuela as the main exceptions. The company is forecasting double-digit peaks in some countries in 2023, but single digits in most of the region’s major economies.
The disinflationary process in Latin America is largely the result of tight monetary conditions and moderation in international prices as global supply chains have returned to greater normalcy, Moody’s says.
The company says that central bank rate hikes in Latin America are producing the desired effect in the battle against inflation: downward pressures on prices due to currency appreciation.
With the exception of Argentina and Venezuela, where inflation has reached three-digit annual rates, inflation has reached double-digit peaks in four of the other six largest economies in Latin America. The pace of price increases remained in the single digits in the other two.
Within these six economies, the highest inflationary mark was reached by Chile with an annual rate of 14.1%, followed by Colombia with 13.3%, Brazil with 12.1%, Uruguay with 10%, Peru with 8.8% and Mexico with 8.7%.
Moody’s argues that many governments took measures to mitigate rising costs faced by families in 2022, either by granting monetary transfers or by regulating some key prices such as fuel and basic food items.
With the exception of the Brazilian central bank, which never viewed inflation as transitory, the rest of the Latin American central banks were forced to accelerate the rate hike cycle as inflation climbed above upper limits. Consequently, monetary conditions entered tightening territory around mid-2022 in the largest economies, and the hikes have continued since then.
Moody’s also notes that continued monetary tightening put most of the benchmark interest rates in double-digit territory in order to halt the inflationary inertia and regain control of expectations.
The highest interest rate was reached in Brazil at 13.75%, followed by a 13.25% rate in Colombia, and 11.25% in Chile, Mexico and Uruguay. After peaking, rates remained on hold to give domestic demand time to absorb the effects of monetary tightening.
The Brazilian success story
The company also points out that the most effective monetary management was implemented in Brazil, where the central bank acted preemptively and to the extent necessary. In that sense, it is no surprise that Brazil has become the first major Latin American economy to bring inflation back to its core target (3.25%).
Within these large countries, the second lowest inflation has been achieved in Mexico, with a rate of 5.2% in June, although it is still above the upper limit of 4%. Next is Uruguay with inflation of 6%, just at the upper limit. Peru has inflation of 6.5%, more than double the upper limit of 3%.
On the other hand, Chile still has an inflation rate of 7.6%, almost double its upper limit of 4%. Colombia is the only country among the big six whose inflation is still in double digits (12.1%). Surprisingly, despite the fact that inflation in Chile is still at more than double its 3% core target and core inflation is three times the target, the Central Bank of Chile has already started the monetary easing cycle by reducing the policy rate.
Chile is not the first country to do so, as the Central Bank of Uruguay enacted its first interest rate cut in early July. One benefit of monetary tightening is that it has produced a positive rate differential between local and external rates.
This has increased the attractiveness of Latin American bond markets, which has generated appreciations of the main currencies and is helping to reduce local currency prices of imported products with additional benefit for inflation in the region. Monetary tightening is producing a competitive appreciation of Latin American currencies.