Latin America maintains its economic expansion “at superheating speed”but this will make it even more difficult for inflation to converge to its objective, which will keep interest rates high, according to what Moody’s Analytics said in a report on Tuesday.
The persistence of the positive gap will make it more difficult for core inflation to converge quickly to its targetwhich implies that central banks will have to keep monetary conditions in restrictive territory to cool their economies,” the document stated.
The report “Latin America in the overheating zone” noted that this region has already recovered its economic level lost in the Covid-19 pandemic and is now expanding at “overheating speed.”
The document prepared by Alfredo Coutiño, director of Moody’s for Latin America, explained that the countries of the region have recovered at different speeds, with Mexico as the one that took the longest to recover from the 8% drop it suffered during the health crisis.
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Despite the different recovery speeds, the main economies have been expanding since the end of 2021, except for Mexico, which only did so until 2022,” he said.
In 2020, The Covid-19 pandemic caused an economic decline of 15% in Latin America for the first half of that yearalthough the impact was different for each country.
Among Latin American nations, Peru took the “hardest hit” in the second quarter of 2020, with a 27% contraction.
In contrast, the recovery also advanced at different speeds, with Brazil, Chile, Colombia, and Peru leading the way, returning their economies to their pre-pandemic level by the end of 2021.
While Mexico took until the third quarter of 2022.
Towards the end of 2022, the seven largest economies (in Latin America) were already expanding and with production processes running above potential. In other words, these economies were operating in overheating territory and developing a positive output gap,” Moody’s said.
The report specified that an economy develops a positive gap when production is overstimulated by excess domestic demand, which drives economies to move faster than natural productive capacity.
However, he qualified that this positive gap “finds accommodation in higher inflation and imports.”
In conclusion, Moody’s highlighted that the persistent inflation in Latin America received a boost from the overexpansion of the region’s economies, pressured by excess demand generated by the extension of the expansionary monetary policies of Latin American central banks.
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