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Mercosur central bankers warn task ahead has become “more complicated”

Monday, February 28th 2011 - 06:50 UTC
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Soaring food and oil prices threaten political stability Soaring food and oil prices threaten political stability

Mercosur central banks’ presidents meeting in Peru last Friday agreed that the task ahead has become ‘more complicated’ because of growing inflationary pressures triggered by soaring food and oil prices.

The region’s top bankers also pointed out the risks of a global slowdown because of the political unrest in Middle East and North Africa. The meeting in Lima began with a presentation by central bank presidents form Brazil and Argentina on the recent G20 ministerial round in Paris.

“The task of central banks becomes more complicated because of several current factors. In first place the high prices of food and oil generates inflationary pressures”, reads the release at the end of deliberations and signed by the central banks from Mercosur (Argentina, Brazil, Paraguay and Uruguay) plus Peru, Chile and Venezuela.

Additionally “because of the strong growth in the region, the significant expansion of credit…the risk that this foreign shock impacts on inflation expectations” has increased and will continue to increase.

The high global prices for commodities and the strong domestic demand will force central banks from Peru, Chile and Brazil to tighten their monetary policies and increase interest rates this year, according to sources close to the meeting.

The central bankers met in Lima to gauge the current global economic situation and to address the issue that higher interest rates increase capital inflows to the region.

“The macro-economic indexes are not showing important misbalances at aggregate value at this moment but this does not mean that in the future the inflow of capitals could not generate risks which would force monetary authorities to continue monitoring their impact”.

The Colombian central bank increased its basic interest rate by 25 points to 3.25%, and this week the Brazil is expected to push the Selic up again. It currently stands at 11.25 following the 75 points increase in January.

The purpose of the increases is to neutralize inflationary expectations given the increase in international prices for food and oil, given the growing uncertainty from the upheaval in parts of the Arab world.

Chile and Peru, which are strong exporters of commodities, are using their abundant forex reserves to absorb some of the increases in basic produce so that consumers don’t suffer the full impact.

However as has happened until recently higher rates could have a boomerang effect for Latin American countries since it attracts even more capital inflow moved by strong growth rates, thus further strengthening local currencies and eroding exports’ competitiveness.

Bankers agreed that other risk factors include a possible slowing down, above forecasts, of the Chinese economy added top the overall uncertainty about the sustainability of fiscal policies in several economies from the Euro zone.

Categories: Economy, Politics, Mercosur.

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