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IMF sees tighter monetary policy in Latin America even as economies struggle

Interest rate increases would continue in Latin America as the region reacts to inflationary pressures, even as economies are operating below their potential, said the International Monetary Fund (IMF).

“These interest rate hikes are likely to continue in many countries in the coming months, and if there are signs that inflation expectations are less well anchored, then central banks will have to react quickly,” said Nigel Chalk, Chief Executive Officer. Interim Office of the IMF’s Western Hemisphere Department.

Many central banks around the world have tightened monetary policy or adjusted their language after the reopening after lockdowns from the pandemic triggered a spike in inflation. Transportation bottlenecks and more expensive commodities, from materials to food, continue to push prices up.

Despite the inflationary threat, the IMF expects the economies of Latin America and the Caribbean to grow 6.3% this year and 3% next, after a 7% drop in production during 2020.

However, recovery will occur intermittently, and vaccine availability COVID-19 it will remain a key factor.

Countries that rely heavily on tourism, like many in the Caribbean, will still have challenging outlooks. Tourism in the region is expected to continue to recover slowly, with about 60% of visitors this year compared to pre-pandemic levels.

“Countries should prepare so that this recovery is not a linear path. Instead, they should anticipate a long and winding road ahead, with setbacks along the way, as the damage caused by the pandemic will gradually be repaired, ”Chalk said.

As in the case of the global economy, the balance of risks is tilting downward. Short-term growth depends on supportive policies being replaced by booming private sector demand, while recovery in the United States and China, the region’s main trading partners, has been essential.

“The outlook assumes a continuation of favorable external conditions, high commodity prices, and a reduction in pent-up consumption and investment that has been constrained by the pandemic,” Chalk said.

Targeted investment in health systems and vaccination coverage is likely to be sustained and, in some cases, governments will need to continue spending to support households.

“However, at the same time, it will be important for authorities to signal a credible commitment to put debt back on the downward path,” added Chalk.

Fiscal discipline is being used even as vulnerable populations are having a harder time returning to work and are likely to be further affected by persistent unemployment and school closings, trends that Chalk said “could potentially take longer. many years to reverse ”.

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