Latin America Rate Hikes Are Coming on Relentless Core Inflation

Latin America’s central banks are under pressure to raise their interest rates after reopening economies fueled core inflation and kept headline price rises way above target in June.

Annual inflation is above target in Brazil, Mexico and Chile, with the Andean nation likely to consider raising rates next week, even after prices rose less than expected by analysts last month. In the case of the Latin America’s two largest economies, cost of living increases are even above the ceiling of policy makers’ tolerance ranges.

Latin America Rate Hikes Are Coming on Relentless Core Inflation

What Bloomberg Economics Say

“One common thing is that services inflation -- which is part of core -- is accelerating. That is happening in most countries -- definitely in Chile and Mexico -- and is due to economies reopening, and growing activity in services sectors that have lagged the recovery until now. This is an increasing source of pressure on prices, and one that central banks will have to be more cautious about.

--Felipe Hernandez, Latin America economist

Latin American policy makers are paring stimulus as inflation firms and activity bounces back from a pandemic-driven downturn. Mexico’s central bank unexpectedly raised rates at its last board meeting to 4.25%, while Brazil has signaled it may accelerate the pace of Selic hikes even after three straight increases. Chile considered higher borrowing costs in June, though opted to wait to ensure its intentions were well communicated to financial markets.

Peru’s central bank is expected to hold its interest rate at a record low later on Thursday. Still, in June, policy makers dropped their commitment to keep borrowing costs at 0.25% “for a prolonged time” amid faster inflation.

‘Additional Hikes’

Mexico’s inflation in June was driven by services including restaurants, as well as by processed foods. Core prices, which exclude volatile items like fuel, increased 4.58% on an annual basis.

The stubbornly-high price print coupled with climbing costs for services as the economy reopens “reaffirms our idea that high inflation levels will prevail throughout the remaining of the year,” said Jessica Roldan, chief economist at Finamex. “We now anticipate that the central bank implements additional hikes that take the reference rate to 5% by the end of the year.”

Chile’s consumer prices in the same month were driven by higher transportation costs, as well as housing and basic services. Core inflation stood at 3.10%, matching the previous month’s reading that was the highest since 2016.

Both Mexico and Chile target annual inflation at 3%, with a tolerance range of plus or minus one percentage point.

Brazil’s cost of living increase was pressured by jumps in housing costs mainly due to higher electricity bills, as well as food and transportation. Consumer prices rose 8.35% on an annual basis, the highest level in nearly five years and well above this year’s target of 3.75%.

Policy makers in Latin America’s largest economy have already delivered three straight rate increases of 75 basis points, and they’ve signaled that they may raise borrowing costs by a full percentage point in August.

BRAZIL REACT: June Inflation Slows, High Core Still an Issue

Still, a measure of core inflation reached 4.26% in June, suggesting that pressures are widspread, according to Adriana Dupita, Latin America economist at Bloomberg Economics. The diffusion index, which refers to the share of items that saw a price rise on the month, also remained elevated, she said.

“An uncomfortably high core underscores that inflation remains a challenge in Brazil, despite wide economic slack,” Dupita said. “This reading won’t lead the central bank to deviate from a pledged 75-basis point-hike at its August meeting, in our view. But any increase in expected inflation for 2022 before then could tip the scales for a full-point rate increase.”

©2021 Bloomberg L.P.

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