December 1, 2021

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The International Monetary Fund warns that raising interest rates by the Central Bank does not reduce inflation |  America

The International Monetary Fund warns that raising interest rates by the Central Bank does not reduce inflation | America

Of the seven central banks of emerging economies that have moved their rates in the past three weeks, the Bank of Mexico has applied the most moderate increase, by a quarter point.

At the extreme are the central banks of Brazil, Chile and Russia, which led increases of 150, 125 and 75 basis points in one move, on October 28, 14 and 25, respectively.

According to former IMF economic adviser Raghuram Rajan, the strategy of central banks in the global context of high inflation is not simple.

No central bank wants to be alone in harming a weak economic recovery with its strategy to address the global context of high inflation. It is not an easy decision for the US Federal Reserve, and less so for the central banks in emerging and developing economies that have been hardest hit by the pandemic and its repercussions,” he said in the latest official IMF podcast.

“The situation for the Bank of Mexico is complicated because the economy experienced a contraction in the third quarter which slowed the recovery. It brings about sectoral production gaps that have not completely closed and very high sequential inflation that generates pollution risks in the sector,” said Eduardo Suarez Mogolon, Vice President of Latin America Economic Analysis at Scotiabank. Prices and expectations.

This appears to be the case in Mexico. According to Scotiabank Vice President, Economic Analysis for Latin America, Eduardo Suarez Mogolon, “The situation in Banco de México is complicated because the economy experienced a contraction in the third quarter which slowed the recovery. It brings sectoral production gaps that have not fully closed and sequential very high inflation that generates risks Pollution in setting prices and expectations.

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Without economic growth being an explicit goal for Mexico’s central bank, it should seek price stability at the lowest possible cost to the economy, former governor Agustin Carstens paraphrased.

Not diminished with restriction

According to Pamela Diaz-Lupet, Mexico economist at BNP Paribas, more aggressive rate hikes were not the way to contain inflation or its expectations.

Diaz-Lobe acknowledged that the increase in rates will not curb inflation because, as the Board of Directors emphasized in its monetary announcement on Thursday, raising the rate to 5%, the main origin of these pressures is external, and instead there may be a definite impact. To normalize rates of economic activity.

Mexico holds one of the seven highest inflation in emerging markets, 6.2% annually as of October, with year-end forecasts for inflation that will be above 7%.

The strategic analyst at BNP Paribas took the cases of Brazil and Russia to explain that although emerging countries have been more aggressive in raising interest rates, they have not succeeded in bringing down inflation.

Brazil’s annual inflation rate is 11.1% as of October and the rate has increased by 575 basis points in an eight-month period.

Diaz-Lobe’s observation is also confirmed in the case of Russia, which has accumulated an annual variation of 7.4% in inflation, ranks sixth among the top emerging economies observed, and also stands out for being one of the central banks that tightened mostly in monetary terms. Policy in the year, with cumulative increases of 325 basis points per year.

It’s not hyperinflation

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Central banks’ call from the International Monetary Fund to stay alert about the risks of declining inflation expectations, spurred by the persistence of temporary shocks that drive up commodity prices such as energy.

IMF Economic Adviser Gita Gopinath explained in the same podcast that the world operates in a high inflation environment that should not be confused with hyperinflation.

He added that the recommendation for central banks is to move quickly and in a timely manner, taking into account the time it takes for the economy to respond to monetary policy.

The former Governor of the Central Bank of India, and the current Distinguished Professor of Finance at the University of Chicago Booth School, also acknowledged that this weak economic recovery and high inflation environment presents a clear challenge to the economic authorities.

European Central Bank President Christine Lagarde reiterated on Monday that she will not tighten monetary policy, as that could hamper the recovery of the eurozone. In an intervention before the European Union lawmakers, he admitted that the price hike will continue for a longer period than expected.