Latam | Monetary Policy: Navigating Shocks

Summary

This presentation analyzes the recent evolution of monetary policy in Latin America and three of its main challenges: its interaction with fiscal policy, the increase in natural interest rates, and the impact of increased uncertainty on economic policies.

Key points

• Key points:
• Inflation in Latin America continues to converge toward its central bank targets, but these targets have not yet been met in some countries. Therefore, the restrictive tone of monetary policy in the region persists, despite reductions in nominal interest rates.
• Inflation expectations remain anchored in the long term, but there are short-term risks in Colombia and Brazil.
• One of the challenges for the region's central banks is calibrating the tone of monetary policy in a context where the real neutral interest rate (r*) has been steadily rising since 2020.
• The still-expansionary fiscal policy in Latin America is making the work of monetary policymakers more difficult, especially in Brazil and Colombia. This concern is also evident when analyzing official communications from central banks, particularly in the cases of Colombia and Brazil.
• An additional risk for central banks is uncertainty about economic policies, with significant impacts on variables that affect monetary policy management, such as GDP, exchange rate, capital flows and country risk.

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