Policymakers in the region will face three challenges this year: keeping inflation under control, preventing asset price bubbles from building and managing currency appreciation. All are consequences of strong capital inflows. Interest rates will be raised and macro-prudential measures (including further capital controls) are likely to be deployed. But those countries that are fiscally prudent will fare the best. Chile is likely to be the region’s standard bearer in this regard, although there are signs that Brazil’s new government could surprise too.
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