Central banks in emerging economies such as Mexico face greater challenges due to the risk of a longer duration in inflation, warned the International Monetary Fund (IMF).
As the pandemic continues with the discovery of the new variant of Covid-19, Ómicron, there is a risk of greater pressure on the bottlenecks of global production channels, greater increases in transport prices and a negative impact on expectations. inflation, experts from the Monetary Fund explained.
And as emerging central banks are at greater risk of de-anchoring inflation expectations, the IMF experts call for greater caution.
In an analysis, led by the Fund’s economic and monetary advisers, Gita Gopinath and Tobías Adrián highlighted that “this uncertainty will have particularly negative consequences for low-income households and countries, where around 40% of spending is directed to consumption. food”.
They argued that the de-anchoring of expectations is much more likely in emerging markets because in these countries, “economic agents see the need to anticipate inflationary pressures.”
They exemplified with the cases of Brazil and Russia, to explain that those central banks have drastically raised interest rates amid large production deficits related to Covid-19, in movements that could have repercussions on the economic recovery by reducing even more production and employment.
Brazil is the emerging leader in rate hikes with increases of 500 basis points since March, while Russia completed a cumulative increase of 300 points also since the same month.
In the analysis, entitled “Addressing inflation pressures amid a persistent pandemic,” they suggested that monetary authorities “remain agile to act on the data and trends and stay ready to adjust the course of policies if necessary” .
Especially when highlighting that inflationary pressure is generalized in the world, but the pace of recovery between advanced and emerging economies makes a big difference in the necessary normalization of monetary policy.
More inflationary pressure
“This uncertainty due to the new Omicron variant may affect inflation expectations, especially when it occurs in a context where emerging countries face inflation well above their monetary policy objectives,” they said.
They stressed that it is still early to know the impact of the new variant in the pandemic, but the previous diagnosis was that next year the imbalances between world supply and demand that occurred in 2020 and part of this year will decrease.
The risk is a partial reading of this situation, as “the approach of monetary policy to support the recovery may fuel persistent inflationary pressures.”
This is if central banks, particularly in advanced economies, keep the rate close to zero.
The case for emerging markets is higher risk as they are more vulnerable due to wage pressures, lower labor force participation and reduced purchasing power.
Task for emerging
Earlier this year, when inflation rebounded sharply it was fueled by exceptionally high levels in some sectors such as energy and automotive, many of which were expected to reverse by the end of the year as shocks related to the pandemic subsided. .
“Central banks with a long history of low and stable inflation could adequately analyze rising inflation and keep interest rates low to support economic recovery.”
However, IMF experts said risks of further acceleration in inflation are materializing with supply disruptions and high demand that will last longer than expected. This, in addition to the impact that the acceleration in the normalization of monetary policy in advanced economies recommended by the IMF will have on emerging markets.
In short, “policymakers (central banks) must carefully calibrate their response to data. The different inflation conditions and the strength of the recovery between countries show why the monetary policy response must be adapted to the specific circumstances of each country, given the uncertainty associated with Ómicron ”.
ymorales@eleconomista.com.mx