Latin American Central Banks Staring Down Spike in Energy Costs

Latin America’s central bankers are contending with a surge in energy prices as they seek to keep stimulus flowing into economies that have been hobbled by raging coronavirus outbreaks.

Monthly inflation in both Mexico and Chile sped up in March, pressured by sharply higher fuel rates, according to government data published on Thursday. Rising energy costs also likely led Brazil’s consumer prices to the highest in more than four years last month, according to estimates by economists.

Latin American Central Banks Staring Down Spike in Energy Costs

The price spike comes at an inopportune time for regional policy makers, who are leading efforts to drive rebounds in growth. In the past year, Brazil, Mexico, Chile and Peru have cut interest rates to record or multiyear lows, signaling that the monetary stimulus will stay on for long.

Still, oil and food prices have increased amid stronger global demand for commodities, also raising prospects that higher costs could spread to other parts of the economy and complicating the job of the central banks.

What Bloomberg Economics Says

“Higher energy prices during the month are in line with the increase in global oil prices earlier this year. Central banks care about the potential effect that energy prices can have on broader inflation and inflation expectations. In Chile, where inflation is in line with target and expectations are stable, the central bank is not as worried. In Mexico, where inflation and expectations are under some pressure, the central bank has less flexibility.”

--Felipe Hernandez, Latin American economist

--Click here for full note

To be sure, the significant year-on-year gains in energy prices throughout the region are partly explained by base effects. Global markets were roiled last year at the start of the pandemic, sending prices of goods such as oil plunging.

As they recently recovered, consumer prices accelerated, leading policy makers from Chile and Mexico to warn of an inflation peak during the upcoming months before slowing down toward the end of the year.


Yet the temporary effects are significant enough to force some policy makers to change course. Brazil has already given in to inflationary pressure, with the central bank delivering the biggest rate increase in a decade last month despite record virus cases and deaths. Central bank President Roberto Campos Neto has signaled another increase of the same size is on tap in May, a view that’s been priced in interest rate futures.

Inflation in Latin America’s largest economy is expected to have reached 6.2% in March, the highest since December 2016, according to the median estimate of analysts in a Bloomberg survey ahead of Friday’s release.

Mexico’s central bank, known as Banxico, last month held the key rate unchanged at its lowest in almost five years after delivering an aggressive easing cycle since August 2019. Governor Alejandro Diaz de Leon said in an interview following the decision that officials will take a data-dependent approach to future policy decisions.

While economists surveyed in the latest Citibanamex poll expect Banxico to keep rates on hold until 2022, markets are pricing between one and two 25 basis-point hikes this year and over 140 basis points in hikes over the next two years.

In Chile, energy prices jumped 1.7% in March while gasoline surged by 3.2%, well above headline inflation of 0.4%. Unlike Brazil and Mexico, annual inflation for now remained below the country’s 3% target, giving policy makers some added breathing room.

Read More: Chile Consumer Prices Rise Less Than Forecast as Food Costs Drop

Central bank president Mario Marcel said last week that annual inflation will accelerate in the near-term on rising energy costs before easing back to target by December. At the same time, it will take the rest of the year before the economic recovery from the pandemic takes hold.

“I don’t see the central bank changing its view on monetary policy in the short term,” said Rodrigo Aravena, chief economist at Banco de Chile, who expects annual inflation of 3.4% in December. “The pandemic is continuing, and there’s still much uncertainty on the horizon.”

©2021 Bloomberg L.P.

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