Strong capital inflows continue to create something of a headache for policymakers in Latin America. On the one hand, growth should remain strong over the coming quarters, while the inflation outlook is likely to deteriorate. But on the other hand, rapid exchange rate appreciation has given growth an increasingly unbalanced look: domestic demand is racing ahead, while export-orientated sectors are lagging behind. Hiking interest rates to combat nascent inflation concerns would risk fuelling yet further capital inflows and thus exacerbating the problems caused by rapid currency appreciation. Accordingly fiscal policy and other forms of monetary tightening (such as raising banks’ reserve requirements) will have to shoulder the burden of the adjustment. It goes without saying that against this backdrop, the risk of policy error is high and rising.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services