Raising rates

The Ukraine-Russia conflict is compounding inflationary pressures, expect rate rises.

From rising petrol and food costs, war in Europe is compounding already serious inflationary pressures across Latin America. The region’s stocks and foreign exchange have stumbled amid the crisis. This will in turn, force central banks to give serious consideration to increasing interest rates with negative knock-on effects for growth and price increase continues to go up for consumers at a time when wage squeezes across the region are at an all-time high.

An economics and finance editor at a major Brazilian news outlet explained, “The price of commodities produced and exported to Latin America by Russia and Ukraine – which include oil, gas, wheat, corn and fertiliser – are rising rapidly due to supply chain restrictions caused by the conflict and the effect of sanctions which has significantly impacted export volume. This is exerting a particularly pernicious effect on the agricultural sector, critically dependent on the import of grains.”

“[Commodity prices are] exerting a particularly pernicious effect on the agricultural sector, critically dependent on the import of grains.”

Economics and finance editor, Brazilian economics journal

As inflation soars, administrations will struggle to stabilise energy prices, including petrol and electricity. This will have political ramifications particularly in countries holding presidential elections this year, including Brazil and Colombia. In response to soaring fuel price, Brazil’s congress is debating the creation of a fuel price stabilisation fund – other regional administrations are likely to follow suit though severe fiscal constraints will make its implementation and funding difficult.

In Mexico, the AMLO administration raised the possibility of increasing fuel subsidies to shield consumers from price hikes. Memories of the “gasolinazo” protest during January 2017 paralysed the country and the administration being careful to avoid upward price adjustments – subsidies, unsustainable given Mexico’s current finances, are nonetheless politically preferable to the country’s roads thronged with protestors.

Despite the deteriorating inflationary outlook, the direct economic impact of the crisis for Latin America is less severe in comparison with other world regions. Indeed, the region’s economic ties to both Russia and Ukraine are comparatively limited and the knock-on effect on its growth trajectory correspondingly limited,” added the finance editor. Indeed, even in the case of Brazil which does more trade with Russia than any other country in the region, the volume amounts to just under 3% of the country’s total commerce.

“Argentina’s trade dynamics with Russia stand out, it has a high dependence on Russian fuel imports given its critical energy deficiencies,” explained the finance editor.

“Argentina’s trade dynamics with Russia stand out, it has a high dependence on Russian fuel imports given its critical energy deficiencies.”

Economics and finance editor, Brazilian economics journal

Some of the most profound effects of changes in monetary policy are absorbed in agricultural exports through its influence on exchange rates. Fertiliser scarcity, for example, has been significantly exacerbated by the crisis – large numbers of Latin American countries import fertiliser from both Russia and Ukraine. The region’s largest importer, Brazil, faces a serious drag on agricultural activity given the importance of fertiliser to crop cultivation.

Finally, the region’s oil producers, led by Brazil, Mexico and Colombia could stand to be beneficiaries from a more diversified global supply given the negative supply effect of Russian oil sanctions. If so, and administrations up capacity and invest in export infrastructure, central banks may play the long game before raising rates just yet.

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