Latin American economies are well-placed to benefit from a surge in capital flows as the region’s major central banks pivot to exit strict monetary regimes to boost growth and investment, IDB president Ilan Goldfajn told LatinFinance on Monday.
The region led the way globally in monetary tightening in the wake of the pandemic, embarking on a cycle of rate hikes led by Brazil in 2021, after having slashed them a year prior as the financial crisis wrought by COVID-19 unfolded, Goldfajn noted in an exclusive interview with LatinFinance on the sidelines of a conference in Cartagena, Colombia
“Central banks in the region raised rates before the rest of the world because the memory of high inflation was still fresh,” Goldfajn, a former governor of Brazil’s central bank, told LatinFinance.
He said the decision by central banks in the region to increase interest rates before the rest of the world means that they have the possibility of lowering them while they remain high in other parts of the world.
“It looks like the region is going to leave the tightening period before the rest. If this is the case, capital flows will start to flow again,” Goldfajn said on the sidelines of the Finance in Common Summit, a conference of public investment banks.
While inflation rates in some parts of the region, such as Argentina, remain high, they have been declining in most places. Lower inflation rates have already led central banks in Brazil and Chile to ease monetary policy and Uruguay followed suit with a cut last month. Its central bank announced a 75 basis points reduction in its rate to 10% as inflation eased to 4.79% in July, the lowest level since 2017. The rate has converged within the 3% to 6% target band of the monetary authority.
Analysts say Peru could be the next to lower its benchmark rate. Inflation in Peru was an annualized 3.3% in August, nearly within the 1% to 3% target band of that country’s central bank. The bank has held the rate at 7.75% since January 2023.
Foreign investment began to recover last year following the pandemic, according to the World Investment Report 2023 presented in July by the United Nations Conference on Trade and Development (UNCTAD). FDI rose 51% to $208 billion in 2022 on the year, with investment to Brazil increasing 70% to a near-record $80 billion over the same period, according to UNCTAD. Colombia saw an 82% increase in FDI to $17 million in 2022 from the previous year, while it doubled in Argentina and Peru, the data show.