The disinflation observed globally after the peaks reached in late 2021 and early 2022 is a reality. However, there are recognized risks from central banks and processes that are not uniform. Latin America, with a history of general price pressures, is currently experiencing a disinflationary process that is not stable, warns Eirini Tsekeridou, Fixed Income Analyst at Julius Baer, in a report for their clients.
According to the specialist, price pressures continue to emerge in the region, generating instability in the disinflationary process. Although it is not a unique problem for Latin America, it is a concerning factor given the region’s history in this area, according to the European investment bank.
Central Banks Will Be Cautious
The Julius Baer expert highlights observations from several representative economies to explain the disinflationary instability in Latin America. For example, in Colombia, inflation rose marginally in June, mainly due to food prices but also due to rental inflation. The figure is still above the central bank’s inflation target range, and it is likely to be cautious in cutting rates in upcoming meetings.
In Chile, inflation also increased year-on-year, primarily due to food prices and an increase in electricity prices. Therefore, Tsekeridou considers it likely that the central bank of the Andean country will maintain a cautious tone in its next monetary policy meeting due to uncertainty about the direct and indirect impact of electricity price increases in the coming months.
The two largest economies in the region are no exception to this unstable disinflationary process. In Brazil, overall inflation increased year-on-year in June, approaching the upper level of the central bank’s target (3% ± 1.5%), although it was lower than expected after the floods in Rio Grande do Sul and currency depreciation. It is expected that the country’s central bank will maintain the Selic policy rate at 10.5% to keep inflation expectations anchored.
In Mexico, overall inflation also increased in June, mainly due to fruits and vegetables, although core inflation continued its decline. The increase could keep the central bank’s tone cautious, although a 25 basis point cut in August is not excluded to avoid an economic slowdown.
Finally, in the beleaguered economy of Argentina, the news is not much different: overall inflation continues to decrease both year-on-year and month-on-month. The slowdown in inflation should continue due to austerity measures and currency devaluation.
Julius Baer warns that, in general, June inflation data for Latin America show that the disinflation process is no longer smooth; it has some bumps. From their perspective, the region’s central banks will mostly maintain a cautious stance in their upcoming meetings and anticipate that expansion cycles will slow down or stop in 2024 to control inflation and keep inflation expectations anchored.
However, the first rate cut by the Fed, expected by the end of this year, should support performance.
Under the outlined scenario, Julius Baer maintains its overweight position in Latin American equities and corporate debt in strong currency.
For Magdalena Martínez
For Fórmate a Fondo