IMF Says Latin America Needs Prolonged High Interest Rates to Tame Stubborn Inflation

(Bloomberg) — Latin American economies will probably need high interest rates for much of this year, or even into 2024, to tame stubborn inflation, according to the International Monetary Fund.

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“Strong domestic demand, rapid wage increases, and broad-based price pressures all point to a risk that inflation in the region could remain unacceptably high,” analysts Gustavo Adler and Nigel Chalk said in a report published Thursday. “With inflationary pressures proving persistent, central banks will need to remain resolute in their fight until there is an unambiguous downward path for prices.”

Latin America was among the first regions to raise interest rates as economic activity rebounded after the pandemic. Headline inflation is now slowing in the region’s main economies, though this mostly reflects the fall of commodity prices, the Washington-based lender said.

Progress in bringing down core inflation, which excludes volatile food and energy costs, appears to have stalled, the Fund said. High interest rates will guide inflation back to target by 2024 or early 2025, Adler and Chalk wrote.

Some of the region’s main inflation-targeting central banks are facing a political backlash from keeping borrowing costs high.

Brazil’s President Luiz Inacio Lula da Silva has repeatedly criticized the bank’s high interest rate policy. President Gustavo Petro has also complained about Colombia’s central bank which, along with Mexico’s, is the only major inflation-targeting bank the region that is still tightening policy.

The region will experience economic growth of 1.6% this year, accelerating to 2.2% in 2024, according to the Fund’s forecast.

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–With assistance from Patricia Laya.

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