Inflation Prints To Shape Monetary Policy Across Region

• Eleven markets in Latin America will be publishing CPI prints this week, including Chile, Colombia, and Mexico. Base effects, due to the collapse in prices in Q2 2020, will be the primary driver of higher prices in April, though currency weakness, rising energy prices, and supply chain bottlenecks will likely contribute as well.
• Fitch Solutions expects that regional central banks will pay close attention to the rate of inflation acceleration in the next several CPI prints as they consider whether to tighten monetary policy in 2021. In Q1 2021, several major markets saw inflation rise past the mid-point of their central banks’ target range.
• Latin American central banks began aggressively loosening monetary policy in Q2 2020 in order to support credit growth as the region suffered the worst contraction in the global economy. Fitch Solutions does not forecast that any major central banks, outside of Brazil, will enact rate hikes in 2021. However, should inflation accelerate significantly in the months ahead, policymakers would likely be forced to tighten monetary policy, potentially leading to a slower economic recovery than current forecasts.
• In addition, Fitch Solutions has previously highlighted how rising bond yields in the US are eroding the relative attractiveness of Latin American assets. An increase in inflation in the region could exacerbate this trend, causing investors to demand even higher yields as rising prices erode the value of fixed returns. Higher borrowing costs would, in turn, weigh on investment and reduce regional governments' fiscal flexibility.

(Source: Fitch Solutions)