Well-anchored inflation expectations in Latin America are poised to help cushion the impacts of rising oil prices and the threat of an inflationary wave in the region. Latin American central banks have built significant credibility over two decades by anchoring price expectations and strengthening resilience to external shocks, concludes a new study by the International Monetary Fund (IMF), according to a note from "UN News".
More resilient economies
The publication found that, in the vast majority of countries in the region, supply shocks in the post-pandemic period did not raise long-term inflation expectations. This reduced the transmission of shocks in energy and other raw material prices to consumer prices. The analysis also indicates that anchored inflation expectations can help policymakers better manage commitments in the face of oil price shocks. The consolidation of stable inflation expectations among the major economies of Latin America – such as Brazil, Mexico, Colombia, Chile, and Peru – results from reforms initiated approximately 25 years ago. These reforms include the adoption of inflation targets, the strengthening of central bank independence, and the end of fiscal dominance.
Stability is not guaranteed.
Although, on average, inflation forecasts in Latin America still deviate more from targets than in advanced economies, these reforms have positively influenced price expectations, the research shows. The Latin American experience reflects the benefits of frameworks based on inflation targets and independent central banks, which have promoted stability and ended high and volatile inflation. However, the IMF warns that this monetary credibility can be quickly eroded by excessively expansionary monetary policies or abrupt changes in institutional frameworks. The biggest disruption in the history of the global oil market constitutes a new test, but a clear pattern emerges: when expectations are well anchored, economies are better able to absorb these shocks without destabilizing inflation, the publication concludes.
This text was translated by machine from Brazilian Portuguese.