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Increasing pressure for rate hikes in Latin America

(Bloomberg) – A shift toward tighter monetary policy is rapidly gaining momentum in Latin America, while Chile indicates it is ready to raise its benchmark interest rate from a record low in July.

Chile’s monetary policy makers this month considered raising borrowing costs 25 basis points as the economic recovery gathers momentum, according to minutes from the June rate-setting meeting released Wednesday. For his part. Brazil said this week that it could opt for faster monetary tightening in the future, while accelerating inflation in Mexico and Colombia is raising the prospect that their central banks may also reduce stimulus.

Central banks in Latin America are facing pressure to raise their rates, as global and local factors reignite inflation. Policymakers have been hit by higher raw material costs and bottlenecks as the global economy reopens after coronavirus-induced lockdowns. Emergency spending is driving demand in places like Chile and Brazil, while Colombia has grappled with unrest that has hit supplies.

Central banks played a crucial role in the region’s economic response to the multiple waves of the coronavirus. Monetary policymakers in countries like Brazil, Mexico, Colombia, Chile and Peru cut their borrowing costs to multi-year lows, or even record lows, in 2020 as the pandemic crushed demand and confidence.

Now, operators expect Brazil to raise borrowing costs by at least 100 basis points in August after three consecutive increases of 75 basis points, which will eventually push the Selic rate to more than 7% by year-end. Mexico’s central bank is likely to keep the benchmark rate unchanged on Thursday, although the market discounts the first rate hike for September and an adjustment of nearly 75 basis points is expected in December.

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Colombian traders are discounting an increase in borrowing costs within the next two to three months, while Chilean swaps show that the monetary policy rate will increase 25 basis points in July and a total of 150 basis points in six months .

Preparing the markets

Chile’s macroeconomic outlook is improving due to factors such as strong consumption, which means that such a high level of monetary stimulus is no longer required, the central bank’s council said in the minutes. The board added that it needed to prepare financial markets “for the adjustments that would come in the short term.”

“In addition to the fact that the Board considered it important to communicate the beginning of the process of reducing the monetary stimulus, it also deemed it convenient to emphasize that monetary policy would continue to be expansionary for a long time,” the directors wrote. The bank has kept its monetary policy rate at a record low of 0.5% for more than a year.

Central Bank of Chile expects annual inflation to reach 4.4% in December, above the 3% target. It also forecasts that gross domestic product will expand 9.5% this year due to stronger domestic consumption and global demand.

Across Latin America, economic recoveries have been uneven and headwinds such as unemployment and virus outbreaks pose challenges for growth. To complicate matters further, some governments are running out of room to spend, while political uncertainty and social unrest present future risks.

However, stifled demand is driving inflation rates, which are already above the target in countries across the region, and could be slow to fall.

“Central banks in Latin America are getting more hawkish,” economists at Bank of America Corp., including Claudio Irigoyen, wrote this week in a research note. “Major risk events are behind us and growth prospects have improved.”

Original Note: Latin America Rate Hike Pressure Grows as Chile Signals Liftoff

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