Central Banks Across Latin America Get Welcome Inflation News

Inflation slowed more than expected in Mexico and Chile last month, in a sign that Latin American policymakers are finally getting soaring consumer prices back under control.

(Bloomberg) — Inflation slowed more than expected in Mexico and Chile last month, in a sign that Latin American policymakers are finally getting soaring consumer prices back under control. 

Mexico’s cost of living increased 5.84% from a year prior, below the 5.88% median forecast in a Bloomberg survey of economists, while Chile’s annual inflation slowed past all estimates to 8.7%, according to official data published on Thursday. The reports followed smaller-than-expected May consumer price increases in Colombia, Brazil and Peru.

Latin America’s central banks led the world into interest rate hikes in 2021 as inflation surged when demand rebounded after the pandemic. Policymakers aren’t declaring victory yet, given that inflation remains far above target across the region, and core price gauges excluding volatile items remain elevated. 

Still, most of the main inflation-targeting central banks have now seen several months of easing inflation, and investors are betting on borrowing cost cuts in coming months.

“High interest rates are finally starting to bring underlying price pressures under control and on a downward trajectory,” said Brendan McKenna, emerging markets economist and strategist for Wells Fargo & Co. “Once inflation is on a sustainable downward path, then policymakers can move forward with lowering interest rates.”

The consumer price readings are welcome news for central bankers who are worried about a sharp slowdown in economic growth, but who are also fretting that premature easing may leave inflation unhinged. 

Holding Rates

Mexico’s slowdown in inflation was led by energy, including cooking gas, as well as fruit and vegetable prices. Annual core inflation slowed to 7.39% from 7.67%. 

“The strong peso should further assist in the convergence of inflation to the target,” said Alberto Rojas, senior economist for emerging markets at Credit Suisse Group AG. The currency has strengthened by about 12% this year.

Banxico, as the central bank is known, halted its steepest-ever campaign of monetary tightening in May, holding its key rate at 11.25%.

Governor Victoria Rodriguez hinted last week that the central bank will hold borrowing costs at a record-high for at least the next two meetings before beginning to consider easing. The bank targets inflation of 3%, plus or minus one percentage point. 

In Chile, transportation costs slid 1% in May on declines in the cost of both urban and air transit. Communications prices slipped by 0.2%.

Still, a closely-watched price measure that excludes volatile items rose 9.9% in 12 months and 0.5% from April. Chile’s central bank targets inflation of 3%.

What Bloomberg Economics Says

“Lower headline and core Chilean inflation rates in May show upward pressure on prices from supply-chain disruptions and the war in Ukraine is waning. We expect policymakers to hold the benchmark rate at their June 19 meeting and begin cutting in July.”

— Felipe Hernandez, Latin America economist

— Click here for full report 

Chilean central bankers led by Rosanna Costa have remained cautious, holding their benchmark interest rate at an over two-decade high of 11.25% as they reiterate that core price readings have been slow to ease. Still, traders surveyed by the monetary authority see rate cuts starting next month.

“We’ll start to see some central banks get rather dovish in the next policy meetings, when they will open the door to interest rate cuts,” said  Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. “We will see cuts as soon as July in places like Chile and Peru. It’s possible that, by the end of the third quarter, we see also see rate cuts in Mexico and Brazil.”

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