Sticky Inflation Fuels Rate-Hike Pressure in Brazil and Mexico

  • Latin America’s top central banks are coming under growing pressure to raise interest rates, as inflation stands way above the target ceiling in Brazil and Mexico. 
  • Consumer prices in both countries came in above forecasts in May, showing persistent inflationary shocks even as central bankers expect them to be transitory. Inflation in Brazil was driven up by electricity prices, while in Mexico food and services were the main culprits. 
  • Consumer prices in Brazil jumped 8.06% in May from a year earlier, more than double the 3.75% target for 2021. Swap rates rose, with contracts maturing in January 2022 up 5 basis points, as traders bet the central bank will have to raise borrowing costs more aggressively. 
  • In Mexico, annual inflation slowed slightly to 5.89%, still way above the 3% goal. The peso fell slightly after the data was released, then pared losses.’ 
  • The data came ahead of interest rate decisions in both countries. Brazil’s central bank is expected to lift interest rates by 75 basis points next week, its third consecutive hike of that magnitude this year. Mexico’s central bank, known as Banxico, will revisit later this month its decision to hold the benchmark rate at a near five-year low of 4%.

(Source: Bloomberg)