Policymakers tighten the screw

As inflation continues its steady rise, policymakers across Latin America are tightening the screw. Interest rates were increased in Chile, Colombia and Peru earlier this month and are likely to be raised once again in Brazil when COPOM meets in early March. But concerns that aggressive interest rate hikes might attract further capital inflows – and that subsequent currency appreciation might lead to widening macroeconomic imbalances – complicate the fight against inflation. Ultimately this means that other tools will be deployed. Bank reserve requirements were raised in Peru at the start of the month and are likely to be increased once again in Brazil soon. Governments are playing their part too – the new administration in Brazil has announced plans to cut spending by R$50bn (1.25% of GDP) this year, while at the same time heading off union demands for a bigger increase in the minimum wage. Yet with most economies now operating at close to full capacity and global commodity prices still rising on the back of concerns over unrest in the Middle East, it seems that fears about rising inflation are unlikely to fade quickly.