Latin America is being forced to choose between stimulus and fighting inflation

Despite the inflation threat, the IMF forecasts that LAC economies will grow 6.3% this year and 3.0% next, following a 7.0% output drop during 2020

Pedestrians walk in Buenos Aires' financial district, Argentina September 24, 2020. Photo: REUTERS/Agustin Marcarian/ Fila Photo

Interest rate increases are expected to continue across Latin America as the region reacts to inflation pressures, even as economies operate below their potential, the International Monetary Fund said on Thursday.

“It is likely that these interest rate increases will continue in many countries in the coming months and, if there are signs that inflation expectations are becoming less well anchored, then central banks will have to react promptly,” Nigel Chalk, acting director of the IMF’s Western Hemisphere Department, said in prepared remarks ahead of a news conference.

Many central banks across the world have tightened monetary policy or adjusted their language as the reopening after the pandemic-induced lockdowns triggered an inflation spike. Transportation bottlenecks and more expensive commodities, from materials to food, continue to pressure prices higher.

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Despite the inflation threat, the IMF expects Latin America and the Caribbean (LAC) economies to grow 6.3% this year and 3.0% next, following a 7.0% output drop during 2020.

But the recovery will happen in fits and starts, with COVID-19 vaccine availability remaining a key factor.

Importantly, countries that rely heavily on tourism, like many in the Caribbean, will still have challenging outlooks. Tourism in the region is projected to continue to slowly recover, with only about 60% of visitors this year when compared with pre-pandemic levels.

“Countries should prepare for this recovery not to be a linear path,” Chalk said. “Instead, they should anticipate a long and winding road ahead, with setbacks along the way, as the damage brought by the pandemic is gradually repaired.”

The balance of risks, as it is for the global economy, is tilted toward the downside. Short-term growth depends on policy support being replaced by a private-sector demand boom, while the recovery in the United States and China, major trading partners for the region, has been essential.

“The outlook assumes a continuation of favorable external conditions, high commodity prices, and an unwinding of pent-up consumption and investment that has been restrained by the pandemic,” Chalk said.

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Specific investment in health systems and vaccination coverage will likely stay in place, and in some cases there will be need for governments to further spend in support of households.

“However, at the same time, it will be important for policymakers to signal a credible commitment to putting debt back on a downward path,” Chalk added.

Fiscal discipline is being called upon even as vulnerable populations are having the hardest time returning to work and are likely to be further hit by persistent unemployment and school closures, trends that Chalk said “could, potentially, take many years to reverse.”

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