Accelerated inflation poses dilemma for Latin American central banks: Moody's Analytics

MEXICO CITY, May 10 (Xinhua) -- Escalating inflation in several Latin American countries is posing a dilemma for central banks, which will have to choose between reining in rising prices and spurring weakened economies, according to Alfredo Coutino, director for Latin America at Moody's Analytics.

In an interview with Xinhua, the head of regional economic research at the analytical arm of the credit rating agency noted inflation is rebounding mainly in Latin America's largest economies, such as Brazil, Chile and Mexico, which are still struggling with the spread of COVID-19.

"Latin American inflation, as in most emerging markets, has external and internal factors," explained Coutino, listing recent increases in international food and oil prices among the external influences.

"On the domestic side, there are interruptions in internal production processes caused by the persistence of the epidemic, which limits the supply of goods and services," Coutino said.

Adding to this mix is the expansion of monetary conditions decided by several regional central banks following the escalation of the pandemic, which in turn affects the local exchange rate, the expert explained.

This situation has, for example, caused inflation to rise above 6 percent in Brazil and Mexico, exceeding the target rates set by the monetary entities, while in Peru the consumer price index surpassed the target of 2 percent.

Although in Chile the indicator fell within the 3-percent target, it has been on an upward trend since the middle of last year, Coutino said.

"Now that inflation is becoming a risk, central banks face an apparent challenge: continue to support the economy or backtrack to fulfill their anti-inflationary function," he said.

"If they fulfill their mandate, then they have met the challenge, but they are putting their countries' still weak economic recovery at risk," he added.

Since 2020, most central banks in Latin America have centered their monetary policy on helping the economy to mitigate the impact of the pandemic on the region, the one most affected by COVID-19 globally, Coutino noted.

Interest rates are well below neutral rates in several regional countries, while the real amount of money per unit of product is growing at a much faster rate than previously recorded.

This implies that the money in circulation exceeds the amount of goods and services produced by the economy, and that excess translates into higher prices or greater imports.

"In that sense, and in adherence to their mandate to control prices, Latin American central banks have no option but to begin the process of reversing their expansive monetary cycle, not only by normalizing the interest rate, but also by withdrawing the excess liquidity they pumped into the economy," said Coutino.

"Unfortunately, Latin American central banks have become victims of their own one-goal monetary mandate (to rein in inflation), because faced with rising inflation they have to tighten monetary policy with the possible risk of weakening or at least restricting the ongoing economic recovery," he added.

The pandemic caused Latin America's economy to plunge 7 percent in 2020, according to Moody's Analytics.

For 2021, Coutino has forecast a regional economic rebound of 4.8 percent.