LATAM countries: has the inflation menace been tamed?

Economic analyst

Policymakers in the US and several European countries have started to talk aloud about the risks of prolonged and high inflation, which should influence their monetary policy, bringing the timing of the withdrawal of stimulus and rate hikes closer.

As the FxPro Analyst team stressed, however, Latin American countries have been a few steps ahead in defining the scope of the inflation threat and have been much quicker to start tightening monetary conditions.

Yesterday, Chile sharply increased its key interest rate by 125 points, almost doubling it to 2.75%. Furthermore, the country's government is considering cancelling the current spending tranches of pension savings, as they further fuel inflationary sentiment.

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By LiAndStudio

Earlier, the Central Bank of Brazil raised its rate by 100 points, and the Bank of Mexico has conducted its third tightening in its monetary cycle.

It is too early to say that the menace of inflation has been beaten since it is becoming more widespread and is in no hurry to recede. However, the very fact that the LatAm countries have turned their monetary policy cycle faster than the USA draws a clear contrast in the state of the economy.

However, be prepared that emerging market currencies could remain vulnerable for quite some time. Investors are generally cautious with emerging market assets while inflation or inflation expectations are above the key rate. But the same cannot be said for the dollar, which has generally been on an upward trend since June. There has been enough reliable evidence to suggest that the Fed is considering tapering its buying programme in the coming months.

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By eamesBot

Market expectations that the spread between inflation and the key rate will continue to widen are putting pressure on the peso, sending USDMXN to 20.90 today, the highest since April. These factors could take the pair to 22 before the end of October.

USDBRL, amid pressure on risky currencies and volatile commodity and energy prices, has the potential to return to yearly highs near 5.80 by the end of the month, against the current 5.47.

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I'm Alex Kuptsikevich, the senior financial analyst at FxPro. Market professional with 16-years’ experience. Author of daily reviews on the impact of economic events with comments regularly featured in top international and Russian media. In my articles, I cover fundamental analysis, global markets, foreign exchange market, gold, oil, cryptocurrencies.

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