Rising global inflation rates combined the US Federal Reserve’s recent decision to increase US interest rates by 75 basis points, the third increase in three quarters this year, led the Central Banks of Mexico, Colombia, and Peru to act by increasing their own interest rates on the last weekend of September.
A regional economist explained, “There is great variety across Latin America, partly because there are countries that are much more self-sustainable than others in terms of food and oil. Mexico, Colombia, and Peru are seeing high inflation, whereas Bolivia’s inflation is low because they have plenty of gas and food and are not so connected to international trade flows. Then there are countries like Venezuela and Argentina, well, we all know about them. The Central American countries are being hit very hard by inflation because they are net importers of oil.”
“Mexico, Colombia and Peru are seeing high inflation, whereas Bolivia’s inflation is low because they have plenty of gas and food and are not so connected to international trade flows.”
Latin American economist, Mexico
The Bank of Mexico (“Banxico”) raised its key interest rates 75 basis points to an unprecedented 9.25% with the aim of maintaining prices of basic food items as the inflation hit 8.76% in the first semester of 2022. Similarly, on 29 September, the Central Bank of Colombia raised its policy rates by 100 basis points to 10%. This may not be the last increase, as the Central Bank aims to bring inflation back to its long-term target of 3%. At the same time, on 6 October, Peru increased its benchmark interest rate by 25 basis points to 7%, marking a 675 point from the start of the monetary cycle in July 2021 as inflation reached an annual 8.53%.
“The current situation is a test of institutional strength,” explained a retired Central Bank executive in Colombia, “if external conditions don’t improve and the price of oil continues to rise the situation could get difficult. Frontal criticism of the Banco República by the Executive has already begun. At this moment, for President Petro to say that he is going to intervene with the Banco República to prevent interest rates from rising would unleash chaos and economic panic that would make it much more difficult for him to achieve the very objectives he is seeking.”
In contrast, the Central Bank of Brazil (“BCB”) halted the cycle of interest rate increases by leaving the Selic rate at its 13.75% on 21 September. Brazilian inflation rates had decreased slightly in September due to the government’s cuts on taxes and fuel, but a lack of consensus at BCB suggested that the debate over interest rates will continue until the end of the year. The economist remarked, “President Bolsonaro is trying something different because he is facing an election. He has massively reduced tax rates on transport which obviously has a significant impact on inflation but this has just given the Central Bank a bit of breathing space, it is a temporary solution.”
“I think monetary policy in Mexico, Colombia and Peru is way ahead of the cycle.”
Asset manager, Peru
A Peruvian asset manager felt a temporary solution might be enough, “I think monetary policy in Mexico, Colombia, and Peru is way ahead of the cycle. We are not expecting any further large rate hikes, maybe some smaller ones but we expect inflation is going to go down, commodities are going down, urea is going down, sea freight is going down. When will it end? When the Russia’s war is over or when commodities have fallen sufficiently.”
However, in a recent report published by Credit Suisse on 30 September, the bank claimed that inflationary pressures have been stronger and more persistent than expected. The report predicted that monetary policy would remain tight and will likely extend throughout 2023 due to a global economic slowdown and higher global interest rates.