THE International Monetary Fund (IMF) is urging central banks in Latin America and the Caribbean to “stay the course” of tightening monetary policy and “avoid easing prematurely” in the face of inflation which is the highest in the region for two decades. The urging comes as over the last two months, an increasing number of central banks in the region have begin to halt protracted interest rate hikes or sending signals that those hikes could come to an end soon.

Argentina, Paraguay and Brazil have held policy rates at their most recent monetary policy meetings. At the same time, Dominican Republic, Costa Rica, Peru and Chile have signalled they may stop raising their policy rates in the near future.

But the IMF is appealing to these central banks, and others looking on, to maintain their fight against inflation, by maintaining tight monetary policy, including interest rate hikes, because reversing them before it is appropriate to do so could have long-lasting detrimental effects.

“With inflation yet to abate and most economies still operating at or near potential, monetary policy should avoid easing prematurely and must stay the course,” the IMF said in its Regional Economic Outlook for the Western Hemisphere for which it held a press briefing in Santiago, Chile, on Wednesday. “Having to restore price stability later if inflation becomes entrenched would be very costly,” the fund added.

The urging comes as inflation in Latin America and the Caribbean has been on an upward trend since early 2021, reaching levels not seen since 1996 and posing the greatest challenge to the region’s inflation-targeting regimes since their inception.

The monetary authorities in those countries were swift out of the blocks in raising interest rates well ahead of other economies, helping to contain price pressures and keep long-term inflation expectations anchored. Still, “inflation remains high and is expected to recede only gradually,” the IMF said in press release accompanying its Regional Economic Outlook.

But while calling for the maintenance of tight monetary conditions, the IMF has also called for governments to implement the necessary fiscal support to mitigate the impact of inflation on the most vulnerable, but said these should be accompanied by compensating measures, where fiscal space does not exist, but also to support monetary authorities’ efforts to tame inflation.

What central banks in Latin America and the Caribbean are doing

So far, the Central Bank of Paraguay’s monetary policy committee held rates at 8.5 per cent at its October 21 meeting. Its move came after 14 consecutive increases since August 2021, totalling 775 basis points. Paraguay’s central bank’s MPC said inflation had fallen from 10.5 per cent year on year in August to 9.3 per cent in September, and was decelerating faster than staff had expected. “Medium-term inflation expectations have stabilised, although they remain slightly above the [4 per cent] target”, the committee added. The IMF forecasts Paraguay’s inflation will end 2022 at 8.2 per cent.

Paraguay’s central bank is following the path that is already being charted by Brazil’s central bank which kept rates unchanged on October 27, in its last monetary policy decision at 13.75 per cent. It was the second-consecutive meeting in which Brazil’s central bank has kept rates unchanged after 18 months of hawkish policy. From March 2021 to August 2022, Brazil’s central bank gradually increased rates from its record low of 2 per cent.

Brazil’s inflation peaked in April at 12.1 per cent year on year, but has since fallen to 7.2 per cent in September. The inflation target in Brazil is 3.5 per cent for 2022. The target rate falls to 3.25 per cent in 2023 and 3 per cent in 2024. IMF forecasts, however, suggest Brazil’s inflation will be 6 per cent this year and 4.7 per cent in 2023.

Central bank officials in Peru and Chile have also indicated rate increases may end soon in their countries. On October 12, the Central Bank of Chile raised its benchmark rate 0.50 per cent to 11.25 per cent, but said it believed “the monetary policy rate has reached its maximum rate of the cycle that began in July 2021.”

“We believe that we are near the limit” of the tightening cycle, the governor of Central Reserve Bank of Peru Julio Velarde said on October 21, though he immediately added, “I cannot say it [for sure].” The bank’s board has raised its policy rate for 15 consecutive months, to 7 per cent.

In Argentina, the central bank board held interest rates at 75 per cent at its October 20 meeting for the first time this year. The central bank has been pursuing “a process of monetary policy normalisation” since the beginning of 2022, hiking rates in nine consecutive monthly meetings.

The Dominican Republic central bank’s board ordered a 25 basis points rate hike on October 31, but indicated this may be the last increase in its cycle. The increase — the tenth since last November — brings the policy rate to 8.25 per cent, 525 basis points above its pandemic rate and 100 basis points above the neutral rate. In its statement, the board said the policy rate had reached the “appropriate level” for inflation to reach its target level by June 2023. The central bank’s inflation target is 4 per cent, plus or minus one percentage point. The IMF forecast is for inflation in the Dominican Republic to moderate to 4.8 per cent in 2023, down from 9.5 per cent this year.

Meanwhile in Costa Rica, the central bank board raised its policy rate for the eighth-consecutive time, while hinting it would continue to raise rates but by lesser amounts. The board increased the rate by 50 basis points to 9 per cent, saying in its statement that it believed headline inflation had peaked in August. It said ensuring inflation returned to target “will require continuing the process of raising the monetary policy rate, though at a lesser rhythm”.

Headline inflation in Costa Rica fell to 10.4 per cent in September, down from 12.2 per cent in August, but core inflation remained high at 6.5 per cent, though it declined from 7 per cent a month earlier. Costa Rica’s central bank inflation target is 2 per cent to 4 per cent.

The IMF expects inflation Costa Rica to top 9.5 per cent this year before falling to 4.8 per cent in 2023. The country’s central bank expects the rate to fall close to the mid-point of the target range, 3 per cent, by the second quarter of 2024.

Other Latin American countries are reporting inflationary pressures have moderated. In Mexico, year-on-year inflation declined to 8.5 per cent in the first half of October, from 8.64 per cent in the second half of September. Core inflation rose, however, from 8.3 per cent to 8.4 per cent. The Bank of Mexico’s target is 2 per cent to 4 per cent.

Banxico, as the Mexican central bank is known, has aggressively increased the key interest rate 525 basis points to a record 9.25 per cent this cycle, which began in June 2021, as inflation surged above a two-decade high. The Central Bank of Colombia’s board has continued its sharp tightening, raising rates by 100 basis points to 11 per cent on October 28.