June 21, 2024

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Latin America Passes the High Inflation Test |  a job

Latin America Passes the High Inflation Test | a job

Previous years have been a test for the global economy. First, a pandemic not seen in a century. second, with a significant acceleration of inflation not seen in decades; Third, with a significant monetary policy response, with increases in interest rates to levels not seen in the past 15 years and an unprecedented rate of adjustment of at least 30 percent, to highlight just a few factors. In this environment, and we remember the difficult eighties in Latin …

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Previous years have been a test for the global economy. First, a pandemic not seen in a century. second, with a significant acceleration of inflation not seen in decades; Third, with a significant monetary policy response, with increases in interest rates to levels not seen in the past 15 years and an unprecedented rate of adjustment of at least 30 percent, to highlight just a few factors. In this environment, and with memories of the difficult 1980s in Latin America, the product of, among various things, the sharp increase in global inflation and the aggressive policy response from the Federal Reserve, it is appropriate and interesting to assess how the region deals with this context and what are the prospects for the coming years.

Latin America in 2020 experienced a strong economic contraction (-6.5%) led by Venezuela and Peru, but also experienced a significant recovery. To get some perspective, Spain at the end of 2022 maintained a lower GDP than observed in 2019 (98.7%) while the region surpassed it (103.6%), with Colombia (110.4%) and Chile (107.4%) to head.

In 2023 and 2024, Latin America will grow by 1.1% below the 2.9% expected globally. This arises, among various factors, from the strong increase in interest rates, between 7.5 basis points (pp) and 11.75 pp in the major countries of the region (excluding Argentina), an increase that does not exceed only the experience among advanced economies (5). pp in the US and 4 pages in the Eurozone), but it was also earlier and faster. This policy response is explained by the high inflation rate, which reached 13.4% in Chile or 13.3% in Colombia, the highest rate except for Argentina and Venezuela which face various challenges, and a greater sensitivity to inflation to maintain the credibility of central banks gained since then. In the nineties.

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The benefit of this remarkably early adjustment is that inflation in the region is already beginning to decline more visibly, especially in Brazil, which led to the monetary adjustment, but is still somewhat late in Colombia and poses significant challenges in Argentina. Most of Latin America, with the exception of Argentina, will see interest rate cuts in 2023, sooner than expected for the United States or the eurozone. Thus, this year there was a rise in most currencies and a moderation in risk premiums in the region, driven among other factors by confidence in economic institutions, especially on the monetary front. Evidence that this situation was very different from that in the past, due in part to the institutional improvement that had been achieved.

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