LatAm rate hikes consistent with pre-Covid strategy – BIS paper

The aggressive rate hikes from Latin America’s central banks in recent years reflected consistency rather than a shift to a more hawkish stance, the latest BIS working paper argues.

The authors – Rafael Guerra, Steven Kamin, John Kearns, Christian Upper and Aatman Vakil – analysed the region’s five main inflation-targeting central banks: Brazil, Chile, Colombia, Mexico and Peru.

The authors observe balanced and counter-cyclical responses to inflation and output between 2007 and 2019. However, during the inflationary surge between 2021 and 2023, the banks appeared to put more emphasis on inflation as rate hikes intensified. This suggests they had become more hawkish during the pandemic and placed overwhelming weight on controlling inflation.

The authors nevertheless argue that this was a continuation of a strategy employed before the pandemic, whereby Latin America’s central banks responded more aggressively to inflation the higher it rose. The authors say the banks employed this “non-linear” strategy because inflation expectations were more likely to become unanchored when prices were rising by a far higher rate than the targeted level.