The cost of living in most Latin American countries is set to keep rising for the remainder of the year increasing the odds of additional monetary tightening in Brazil or the start of a hiking cycle in Colombia, according to J.P. Morgan analysts.

Accelerating inflation is “forcing monetary authorities to act more quickly” to remove the stimulus set in place to mitigate the effects of the COVID-19 pandemic on the regional economies, the analysts wrote in a report dated September 8. “After extraordinary support, normalizing hikes are on the way,” economists including Ben Ramsey, Cassiana Fernandez, Gabriel Lozano, Diego Pereira and Steven Palacio said in the 90-page document.

While the terms of trade remain supportive of a projected economic growth of 6.4% for the region this year, “the strong rise in food prices is dampening purchasing power in many countries,” core inflation is moving higher and consumers expectations are starting to be impacted.

Banco Central do Brazil, BCB, may raise its Selic rate by another 100 basis points in the next meeting September 22, pushing the benchmark rate to 6.25%, according to the analysts. In the previous meeting, on August 4, the monetary authority approved its fourth interest rate increase of the year and the biggest in almost two decades to 5.25%.

J.P. Morgan expects BCB to continue upping its benchmark rate for the rest of the year. “As of now, we believe the BCB’s communication is in line with our baseline scenario of another 100bp hike in September, followed by 75bp and 50bp hikes in the last meetings of the year to end the cycle at 7.5%,” the report said.

Brazil’s rate hike may take place even as Latin America’s largest economy faces fiscal uncertainty with the Lower House approving a tax bill that could reduce revenues and no solution yet for the court-ordered payments issue, the analysts said. In addition, the country is also dealing with a water shortage that continues to worsen. “These crosscurrents create a challenge for the Central Bank, which may have to hike the SELIC rate above our 7.5% year-end forecast due to fiscal concerns and inflationary pressures despite a weaker growth outlook,” they add.

Mexico, one more hike

Mexico’s central bank is set to deliver one final rate increase for the rest of the year vs two originally estimated, the analyst said. In a divided decision in its August meeting Banxico boosted rates by 25bps to 4.5%, with two of five board members in favor of staying on hold.

“The debate within Banxico revolves around the best way to deal with a spike in inflation that has been largely driven by supply/costs shocks amid an economic recovery that remains incomplete,” according to the report. “Despite the opposing views on the appropriate policy response, there seems to be a consensus about the fact that inflation pressures are transitory and that policy actions are not intended to normalize the policy stance, but to keep inflation expectations from deteriorating,” the analyst said.

Banxico “should be near the end of its modest hiking cycle,” and for J.P. Morgan the policymakers will announce the final 25bps hike on its September 30 meeting, predicting that Mexico’s full-year inflation will reach 6,5% vs 6,9% projected earlier.

In Colombia, the inflation has delivered some “upside surprises” in recent months, giving reasons to the J.P. Morgan analysts to see additional risks of a possible surge in prices. They project now an annualized inflation of 4.67% by the end of this year and at 3.4% for the end of 2022.

Colombia’s central bank kept its policy rate on hold at 1,75% in its July 30 meeting, the same as last September, but the J.P. Morgan economists expect BanRep to begin raising rates with a September 30 decision. “Our call is for BanRep to start the cycle with 50bp hike in September and for the policy rate to reach 3.0% by January. Our forecast is for the policy rate to reach 4.25% by year-end 2022 after a pause in 1H22 during the election cycle,” they said in the report.


Inflation at 49% in Argentina

The monetary policy continues to play “a passive role” in the broad policy framework implemented by the Alberto Fernandez’ administration and Argentina’s central bank, known as BCRA. “Despite the year-to-date acceleration in underlying inflation, the central bank continues to rely on frictions such as capital controls and intervention in the parallel FX market instead of signals from benchmark interest rates, such as the Leliq or Badlar rates.”

Inflation in the South America nation “is poised to accelerate again absent a rethinking of the policy framework.” In that scenario, the J.P. Morgan economists see a return to 3.5%-4% monthly gains by the end of the fourth quarter and the first of 2022 “amid stronger FX passthrough pressures, upcoming salary re-negotiations and as the government resumes utilities tariff increases and partially unwinds price control programs.”

Inflation may stay high next year and the bank forecast a 44% annual rate for December 2022 vs an expectation of 48.6% at the end of this year. “We highlight risks of Argentina experiencing a more abrupt inflation surge next year if the government fails to agree on a consistent and comprehensive macroeconomic program” with the International Monetary Fund, they said.
The bank’s base case scenario considers that Argentina will reach a “technical understating” with the IMF by January and the board would approve an Extended Fund Facility, or EFF, by March of next year. “We don’t expect the program to reopen market access,” they add.

Argentina holds primaries elections September 12 and mid-term election on November 14.

Peru’s central bank raised its benchmark rate by 50bps to 1% on September 9, following a 25bps hike on the August 12 meeting. The board took into consideration that the year-on-year inflation rate rose from 3.81% in July to 4.95% in August, temporarily above the target range, “due to factors such as the increase in international prices of food and fuel, as well as the exchange rate,” the bank said in the monetary statement.

J.P. Morgan economists had forecast a half percentage point hike as a necessary step to prevent “further de-anchoring of the inflation expectations” in the Andean country. The annual inflation rate in Peru accelerated for a fourth straight month to 4.95% in August, the highest level since February of 2009.