Consumer prices in Latin America’s two largest economies diverged in early November, complicating Brazil’s plans to hold its benchmark interest rate at a record low while suddenly giving Mexico space to cut.
Brazil’s prices climbed 4.22% from last year, surpassing the 2020 target of 4% for the first time since mid-February, according to data published Tuesday. Meanwhile annual inflation in Mexico slowed to 3.43%, less than expected by all analysts in a Bloomberg survey, and below the country’s target ceiling, according to Bloomberg News.
Brazil and Mexico have put low interest rates at the center of plans to revive growth following historic recessions caused by the coronavirus. Both countries are grappling with headwinds including weak labor markets and uneven demand across different sectors of the economy. Still, their monetary policy outlooks have been muddled by recent consumer price increases.
In Brazil, costlier food and fuel will test the central bank’s pledge to hold the key interest rate at 2%. Yet central bank chief Roberto Campos Neto insisted late on Tuesday that inflation remains under control and that price pressures are temporary.
Mexico’s central bank, known as Banxico, paused a cycle of 11 straight rate cuts this month due to above-target inflation. Since then, a 12-day period of massive retail discounts akin to Black Friday helped depress non-food merchandise prices while fruit and vegetable costs also dropped.
Analysts in a weekly Brazil central bank survey have raised their 2021 consumer price forecasts for five straight weeks, and there are signs that faster inflation has started to weigh on consumption. Retail sales in September rose less than expected as supermarket sales, including food and beverages, slipped by 0.4%.
While traders in interest rate futures still see higher borrowing costs starting early next year, many economists expect Brazil’s central bank to avoid rate hikes unless there’s a significant change in the nation’s fiscal policy.
Similarly, Mexico’s traditionally conservative central bank could wait until the effects of the shopping holiday have worn off before deciding whether to cut further.
Rushing to cut rates “is not how Banxico does monetary policy,” said Jessica Roldan, an economist at Mexican brokerage Finamex. “We believe that Banxico will wait until next year, once the increase in the minimum wage is delivered and possible direct and indirect effects have materialized, to make any move.”