Since this year, under the influence of multiple factors such as the Fed's successive aggressive interest rate hikes, the Ukraine crisis, and international commodity prices remaining high, the local currency exchange rates of major Latin American economies have fallen, import costs have increased, and imported inflation has become increasingly serious. To this end, Brazil, Argentina, Chile, Mexico and other countries have recently taken follow-up interest rate hikes in response.
Observers pointed out that the major Latin American central banks to raise interest rates initiatives to ease the effect of inflation is limited. This year and in the coming years, Latin America will face challenges such as increased inflationary pressure, investment decline, or return to low growth levels.
Argentina's National Institute of Statistics and Census data show that Argentina's inflation rate reached 7.4% in July, the highest since April 2002. Since January of this year, Argentina's cumulative inflation rate has reached 46.2%.
Data from Mexico's National Institute of Statistics and Geography show that Mexico's annualized inflation rate reached 8.15% in July, the highest since 2000. Chile, Colombia, Brazil and Peru and other Latin American economies have recently released inflation figures are also difficult to say optimistic.
The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) released a report at the end of August, pointing out that the average inflation rate in the LAC region reached 8.4% in June this year, almost twice the average inflation rate in the region from 2005 to 2019. The outside world fears that Latin America may be experiencing the worst inflation since the "lost decade" of the 1980s.
The Fed's aggressive interest rate hikes have raised concerns about the Latin American economy that are not unfounded. In the late 1970s and early 1980s, financial globalization accelerated, international capital markets were flooded with "petrodollars," and the size of Latin American countries' foreign debt continued to swell. The U.S. interest rate hike cycle to counteract inflation led to an unsustainable debt crisis for Latin American countries as interest rates rose. The 1980s were also called the "lost decade" of Latin America.
In response to the depreciation of the local currency, reduce capital outflows, reduce debt risk, Brazil, Argentina, Chile, Mexico and other countries have recently followed or even preceded the Federal Reserve to raise interest rates, of which the most number of interest rate adjustments, the largest magnitude is Brazil. Since March last year, Brazil's central bank has raised interest rates 12 times in a row, gradually increasing the benchmark interest rate to 13.75%.
On August 11, Argentina's central bank raised its benchmark interest rate by 9.5 percentage points to 69.5%, marking a tougher stance on inflation by the Argentine government. On the same day, Mexico's central bank raised its benchmark interest rate by 0.75 percentage points to 8.5 percent.
Economists pointed out that the current round of inflation is mainly imported inflation, interest rate increases can not solve the problem at its root. Interest rate hikes also increase the cost of investment and inhibit economic dynamism.
Carlos Aquino, director of the Center for Asian Studies at the National University of San Marcos in Peru, said that the Fed's continued interest rate hikes have made the Peruvian economic situation "worse". The U.S. financial policy has traditionally considered only its own economic interests, through the financial hegemony to "transfer" the conflict, so that other countries pay a heavy price.
At the end of August, ECLAC raised its regional economic growth forecast to 2.7%, higher than the 2.1% and 1.8% forecast in January and April this year, but much lower than the region's 6.5% economic growth rate last year. ECLAC Executive Secretary pro tempore Mario Simoli said the region needs to better coordinate macroeconomic policies to support economic growth, increase investment, reduce poverty and inequality, and control inflation.