Inflation in LatAm Is Hitting a Turning Point, Fueling Rate Cut Calls

Dogged by fresh memories of forecasting failures during the pandemic, central bankers across the Americas have pointed to worrying signs in underlying price gauges

Security in front the Central Bank of Brazil in Brasilia.
By Maria Eloisa Capurro and Matthew Malinowski
May 19, 2023 | 12:59 PM

Bloomberg — Latin America’s top central bankers will meet in Brazil on Friday as pressure mounts on them to begin cutting interest rates in response to slowing inflation.

Political leaders, investors and businesses across the region that led the world into an aggressive tightening campaign after the Covid-19 pandemic are now anticipating — and in some cases demanding — imminent rate reductions.

That is testing the resolve of central bankers who remain hesitant to declare victory even as they appear to have gained the upper hand on consumer price increases.

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“Central bankers are more cautious after such a long period of above-target inflation,” Cassiana Fernandez, a Latin America economist at JPMorgan & Chase Co, said ahead of the meeting.


For policymakers like Brazil central bank chief Roberto Campos Neto, the Sao Paulo gathering is a chance to rally together to make the case to impatient politicians that their caution is justified.

Campos Neto, who is hosting the event, has faced unrelenting criticism from President Luiz Inacio Lula da Silva over his decision to hold Brazil’s key rate at a six-year high of 13.75%, even as annual inflation has fallen more than 8 percentage points from a year ago.

Others may soon find themselves in similar scenarios. Chile’s annual inflation rate is in single digits for the first time in 13 months. Even Colombia, a regional laggard that saw prices accelerate at their fastest pace since 1999, has finally reached its “turning point,” central bank head Leonardo Villar told Bloomberg News ahead of the event.


Traders in Chile, Brazil and Colombia now price in odds of rate cuts starting in the second half of 2023. Investors in Mexico, where policymakers this week paused hikes, expect easing to begin before the end of year.

But dogged by fresh memories of forecasting failures during the pandemic, central bankers across the Americas have pointed to worrying signs in underlying price gauges.

Headline inflation may be tumbling in response to lower commodity prices, falling food costs and regional currency appreciation. But the picture isn’t as rosy as it seems when volatile items like food and energy are excluded, and inflation isn’t likely to hit central bank targets across the region until late 2024, Fernandez said.

Labor markets, meanwhile, are holding up against restrictive monetary conditions and tepid growth, with unemployment rates at pre-pandemic levels. Stronger services and measures of overall activity have also puzzled analysts who bet on more sluggish economic results.

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Are Cuts Premature?

Those factors have left Latin American central bankers on high alert. In Brazil, Campos Neto has warned that his country’s economy may be entering a new phase marked by painfully slow declines in core inflation and unhinged consumer price forecasts.

Brazil’s headline inflation prints are approaching 4%, but three months of tax cut-driven price drops at the end of 2022 make them appear lower than they should, analysts like Gustavo Arruda, a Latin America economist at BNP Paribas, say.

“When those cuts are out of the data set, we’ll see the real inflation rate,” Arruda said. Most analysts project consumer price increases around 6% by December.


Chile central bank President Rosanna Costa has cautioned investors and lawmakers in her nation that leftover cash may still be slushing around its economy, after Chileans made $50 billion in early pension withdrawals while government transfers reached 90% of households during the pandemic.

But the biggest fear plaguing central bankers in Latin America is even simpler: That their rate cuts will prove premature, forcing them to reverse course and start tightening again. Both Peru central bank President Julio Velarde and Roberto Steiner, the longest-serving co-director at Colombia’s monetary authority, have expressed such anxieties in recent weeks.

“We are trying to understand if current dynamics will stay,” BNP’s Arruda said. “We believe inflation will be stickier in the next few months, but we are following every number in detail trying to understand the outlook.”

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Imminent monetary easing

Investors still say monetary easing is not a matter of “if” but “when,” as the delayed effects of aggressive rate hikes in 2021 and 2022 hit local economies and growth falters.


Two of Latin America’s oft-overlooked economies — Uruguay and Costa Rica — have already embarked on rate cuts. A combination of falling inflation expectations and restrictive fiscal policies are likely to make either Peru or Chile the next in line around the middle of this year.

In Brazil, central bankers are monitoring the advance of legislation aimed at controlling debt and shoring up public spending, which could lead to rate cuts in September. Mexico and Colombia are likely to follow only later.

“Given how quick they were to raise interest rates, they will probably be among the first to cut interest rates, too,” Kimberley Sperrfechter, a Latin America Economist at Capital Economics, said about the region’s central banks.


--With assistance from Davison Santana.