LatAm Central Banks To Tighten Monetary Policy In H221 As Inflation Accelerates

• Fitch has shifted its monetary policy outlook for Latin America as several major central banks in the region have either begun to hike their benchmark interest rate, or have primed markets for H2 2021 tightening through changes in their forward guidance. 
• In 2020, Latin American central banks slashed interest rates to all-time lows in response to the economic impact of the COVID-19 pandemic. Central banks across the region further eased credit conditions by cutting reserve requirements and launching extraordinary lending facilities to ensure the smooth flow of credit to household and businesses, with the aim of preventing financial instability amid the health and economic crises. 
• At the beginning of 2021, Fitch expected nearly all central banks in Latin America would keep interest rates at historic lows through the end of the year, with the lone exception of the Banco Central do Brasil (BCB). However, it now expects that central banks in Chile, Colombia and Mexico will tighten monetary policy in 2021, and as such has revised up its end-year interest rate forecast for the BCB to 6.25%, from 5.00% previously. 
• The BCB has already hiked its benchmark rate by 225 basis points (bps) to 4.25% in June in response to above-target inflation and volatile market sentiment. A similar, though less aggressive, story has played out in Mexico, in which the Banco de Mexico (Banxico) carried out a surprise, 25bps hike at its June meeting after an inflation print for the first half of the month came in well-above target. 
• While these forecasts represent a significant change in Fitch’s monetary policy outlook for the region, it sees further upside risks to the forecast. The continued acceleration of inflation in the US could push the US Federal Reserve to bring forward its monetary policy normalization, which would likely prompt capital outflows from risky assets. Latin American central banks would likely respond with more hikes than is currently anticipated in an effort to stem outflows.

(Source: Fitch Solutions)