Rising rates have not stopped inflation; recovery can be damaged: IMF

Among the seven central banks of emerging economies that moved their rate in the last three weeks, the Bank of Mexico was the one that applied the most moderate increase, of a quarter of a point.

At the extreme are the central banks of Brazil, Chile and Russia, which led increases of 150, 125 and 75 basis points in a single movement, this on October 28, 14 and 25, respectively.

According to the former economic adviser of the International Monetary Fund (IMF) Raghuram Rajan, the strategy of central banks in the global context of high inflation is not simple.

“No central bank wants to be singled out for damaging the weak economic recovery with its strategy to face the global context of high inflation. It is not an easy decision for the Federal Reserve of the United States, and less so for the central banks of emerging and developing economies that have been the most damaged by the pandemic and its aftermath, “he said in the most recent official IMF podcast.

That seems to be the case in Mexico. According to the vice president of economic analysis for Latin America at Scotiabank, Eduardo Suárez Mogollón, “the situation for Banco de México is complicated because the economy went through a contraction in the third quarter that slowed down the recovery. It brings sectoral production gaps that have not closed completely and a very high sequential inflation that generates the risk of contamination in the setting of prices and expectations ”.

Without having economic growth as an explicit objective of the Mexican central bank, it must seek price stability at the lowest possible cost for the economy, paraphrased former Governor Agustín Carstens.

It has not diminished with restriction

According to Pamela Díaz Loubet, the economist for Mexico at BNP Paribas, greater aggressiveness in raising rates has not been the way to contain inflation or its expectations.

Díaz Loubet acknowledged that an increase in rates will not limit inflation because, as the Governing Board stressed in its monetary announcement on Thursday, where it raised the rate to 5%, the main origin of these pressures is external and instead there could be certain impact of the normalization of rates on economic activity.

Mexico maintains one of the seven highest emerging market inflations, 6.2% annually as of October, with expectations for the end of the year of inflation that will be above 7 percent.

The BNP Paribas strategist took the cases of Brazil and Russia to explain that even though the emerging countries are more aggressive with rate hikes, they have not managed to reduce inflation.

Brazil has an annual inflation of 11.1% as of October and a rate that has increased by 575 basis points in a period of eight months.

Díaz Loubet’s observation is also confirmed in the case of Russia, which accumulates an annual variation of 7.4% in inflation, it ranks as the sixth highest of the emerging economies observed and also stands out for being one of the central banks that has tightened the most monetary policy in the year, with accumulated increases of 325 basis points in the year.

It’s not hyperinflation

The call to central banks from the IMF has been to remain alert about the risks of a de-anchoring in inflation expectations, driven by the persistence of transitory shocks that are increasing the prices of commodities such as energy.

The IMF’s economic adviser, Gita Gopinath, explained in the same podcast that the world is operating in an environment of high inflation that should not be confused with hyperinflation.

He added that the recommendation to central banks is to act quickly and in a timely manner, considering the time it takes for the economy to respond to monetary policy.

The also former Governor of the Central Bank of India, and current Distinguished Professor of Finance at the University of Chicago Booth School, admitted that this weak economic recovery and the high inflation environment are a clear challenge for the economic authorities.

This Monday, the president of the European Central Bank, Christine Lagarde, assured that she will not tighten monetary policy, as that could stifle the recovery of the euro zone. In an intervention before European Union legislators, he admitted that the rise in prices will last longer than expected.

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