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SocGen Say Cautious CB Approaches Bode Well For Long-Term CPI Expectations

LATAM
  • SocGen have noted there are ample signs of upward rigidity in December CPI inflation data in many Latam economies, even though inflation continued to decelerate towards the year-end in most of them. Core inflation remains higher than central banks’ target ranges in all the financially integrated Latam economies, and while it is slowly decelerating, the downward trend is curbed by still-high consumption driven by strong labour markets.
  • Despite proceeding with a steady pace of monetary easing in most cases, the LatAm central banks remain highly wary, trusting little to the available inflation forecasts and relying more on actual price data in hand.
  • Real interest rates in all the region’s economies remain around the highest levels (or close to them) of the past decade. As real interest rates are in the restrictive territory (above their neutral levels) in all these economies, the central banks are likely to ease steadily this year.
  • Nevertheless, with most economies still not far below their potential and labour markets looking solid as of now, the central banks are hardly in any hurry to step-up the pace of rate cuts. The Fed’s dovish call in December has probably reduced the upward bias of some Latam central banks.
  • Nevertheless, the banks are still concerned about inflation uncertainties, and probably want to preserve the gains of currency appreciation too. This careful and somewhat hawkish approach on the part of the central banks augers well for longer-term inflation expectations in the region.
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