Latam | Overcoming the challenge of high inflation

Summary

The past couple of years have posed significant challenges for the world economy and Latam. The hike in inflation and monetary policy response are exerting significant presure on activity, with the region growing below the world. Inflation is abating, showing the positive print of the improved institutional framework.

Key points

• Key points:
• A pandemic not seen in a century, rampant inflation not experienced in decades, and a major monetary policy response, with interest rate spiraling upward at levels not seen in 15 years, coupled with an adjustment process not seen in at least 30 years.
• Latam reported a heavy economic contraction in 2020 (-6.5%), led by Venezuela and Peru, though it has also experienced a significant recovery. Looking ahead to 2023 and 2024, Latam will report growth of 1.1%, lower than the 2.9% expected globally.
• This stems, among other factors, from a sharp increase in interest rates (between 7.5 pp and 11.75 pp) in the main countries of the region (excluding Argentina). This increase not only exceeds the levels seen among developed economies (5 pp for the United States and 4 pp for the Eurozone), but also began earlier and has been more aggressive in terms of pacing.
• The reason for this policy response is the upsurge in inflation, which has reached 13.4% in Chile and 13.3% in Colombia, the highest excluding Argentina and Venezuela —which are facing their own challenges—, and because of increased sensitivity to the importance of inflation, as central banks in the region have been looking to build credible anti-inflation policies since the 1990s.
• The good thing about this early and sharp tightening process within the region is that inflation is already starting to show sure signs of easing, especially in Brazil, which led the monetary tightening, though Colombia is lagging somewhat and Argentina still has a huge challenge ahead.

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