Regional inflation concerns have been exacerbated by the slow withdrawal of stimulus measures by policymakers, former Brazilian Central Bank president Persio Arida has said.
In the aftermath of the Lehman collapse and the global financial meltdown, “both monetary and fiscal policies were over-extended,” Arida, a founding partner of the investment bank BTG Pactual, told Emerging Markets in a rare interview.
“Now, the right moment has passed and the inevitable result is inflation.”
Many regional economies announced vigorous spending and investment plans in late 2008 and early 2009 in a bid to kick-start their economies.
But while some policymakers began to withdraw from expansionary monetary stances in late 2009, others failed to do so, despite a sharp rebound in growth. Brazil, for example, extended its fiscal stimulus policy into 2010, despite the fact that its economy grew 7.5% last year.
Arida said that policymakers have been performing a delicate balancing act between withdrawing stimulus measures too early and risking a double-dip recession, or leaving an expansionary fiscal policy in place for too long and facing a build-up of inflationary pressures. Faced with this choice, most have preferred the latter.
“Policymakers prefer to avoid making mistake type one, which is to remove the stimulus too early. Mistake type two is less costly than type one. Monetary authorities preferred to leave late rather than too early. ... and for the right reason,” he said.
“[But] if all countries take the decision at the same time, then it is inevitable that inflation is going to happen.”
Inflation is now tracking close to the top end of target policy ranges across much of the region, and has hit double digits in Venezuela and Argentina. Policymakers in these two countries in particular have been extremely reluctant to tighten.
“The choice for some Latin countries is between inflation and growth. Argentina is seeing Chinese rates of growth, at about 9-10%, but price is close to 30% inflation,” Christopher Ecclestone, equities strategist at Hallgarten & Company, said.
However, many central banks across the region have begun to tighten in earnest in recent months. Brazil and Chile both announced 50 basis-point increases in March, while Peru, Colombia and Uruguay all also raised rates.
Liliana Rojas-Suarez, senior fellow at the Centre for Global Development and former chief economist at Deutsche Bank, believes the timing of these tightening moves has coincided with recent outflows of capital from Latin American equities and bonds.
“Earlier in the year, central bankers were afraid of raising rates because of capital inflows. But now they have the space they need,” she told Emerging Markets.
She thinks that policymakers have been prudent not to raise rates until recently, as doing so would have attracted further capital inflows and exacerbated liquidity and currency appreciation pressures.
“If I were central bank governor and I saw all those capital inflows at end of last year, I would not have increased interest rates,” she added.
“Now that I see this reversal, I see a window of opportunity to increase rates as quickly as I can. They’re doing the right thing. They’re using the window.”