Chile inflation surprise underscores growing regional problem
Falling Latin American currencies are pushing up inflation, but policy reactions are diverging, say analysts
Chile’s official April inflation figure, released
Thursday, held a nasty surprise for investors: a monthly rise
of 0.6%, compared to market expectations of 0.2%, according to
research from Credicorp Capital. The annual inflation figure is
now at 4.3%, compared to 3.5% a month ago.
|| Source: Eneas de Troya
The news triggered a rally in the peso and interest rate swaps
as investors changed their bets to a scenario where the central
bank is forced to delay cutting rates below the current 4%.
That is despite weaker than expected growth figures announced
earlier in the week.
"It puts the central bank in a tricky situation," says
Álvaro Vivanco, rates strategist at BBVA in New York,
discussing the difficulties of tackling above-target inflation
increasingly grim growth scenario.
With the exception of Mexico, inflation is worsening across the
region. Inflation rose about 12% in April in aggregate across
Latin America, according to Capital Economics. Stripping out
Argentina and Venezuela the figure falls to 4.1% —
still a sharp rise on the March figure of 3.1%.
Mexico was the only outlier: there inflation fell to 3.5% in
April from 3.8% in March. "With policymakers seeing through
recent price pressures, and economic growth taking longer to
accelerate than anticipated, interest rate hikes in Mexico are
becoming much less likely," said Capital Economics.
FX to blame
Food and energy are partly to blame for rising prices elsewhere
in the region. But weaker exchange rates are also a factor,
the region’s floating currencies have fallen over
the past year, despite a recent rally, Capital Economics
said in a research note.
More costly imports as a result of weaker exchange rates
"appear to be aggravating inflation to some degree", according
to the research note. "Given that we expect most currencies to
weaken again over the coming months, this will remain a threat
to the inflation outlook," said the note.
Yet despite the common threat of higher inflation, the
macro-economic policy response in the region is increasing
divergent – and far less focused on US rates policy
– compared to six months ago, says Vivanco.
"Rates cycles have got out of sync," he says. "Policymakers are
focusing more on domestic factors now."
As examples, Vivanco points to the contrast between Chile and
The latter surprised the market with a 25bp rate hike, to
3.5%, on April 25 and is trying to stave off further
appreciation of the currency via increased daily interventions
in the currency market. While Vivanco says Chile may now delay
rate hikes, but could still end up hiking rates by another 50
bps before the end of the year.
He also notes the difference between Brazil’s
interventions to defend the currency, and Peru’s
concern to contain any depreciation of the currency, with
Mexico’s approach of keeping rates on hold, and
letting the currency float.
"There is a lot of divergence compared to six months ago. Now
policymakers in each country are doing their own thing."