LATIN AMERICA Inflationary Pressures Rising/Currencies Appreciating: To Tighten or not to Tighten? Carnegie International Economics Program February 16,
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LATIN AMERICA
Inflationary Pressures Rising/Currencies Appreciating: To Tighten or not to Tighten?
Carnegie International Economics Program
February 16, 2011
2
Policy Stimulus Resulted in Record Recovery from Global Recession
-4
-2
0
2
4
6
8
2008 2009 2010 2011f
GDPDomestic Demand
Latin America
f = IIF forecast
Percent change over a year ago
3
Fiscal and Quasi-fiscal Stimulus were Driving Forces
0
1
2
3
4
5
6
Argentina Brazil Chile Mexico Peru
20092010
Latin America
f = IIF forecast
Percent of GDP
4
0
2
4
6
8
10
12
14
Jan 09 Jul 09 Jan 10 Jul 10 Jan 11
Latin America
Monetary Policy: Tightening Cycle Beginning in Some Countries, but Rates Remain Accommodative
percent
*US$ / local currency
Brazil
Mexico
ColombiaChile
5
Food Prices Adding to Inflationary Pressure
135
155
175
195
215
235
Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11
Trade weighted average price
Latin America
Source: UN Food and Agriculture World Food Price Index
6
Inflation Above Mid-Point of Target Band in Most Countries
0
1
2
3
4
5
6
7
Brazil Chile Colombia Mexico Peru
Percent change over a year ago
Latin America
Actual Inflation
Target Band
Mid-Point
7
High and Rising Inflation in Argentina and Venezuela
10
15
20
25
30
35
40
Argentina Venezuela
2009 2010 2011f
Latin America
f = IIF forecast
Percent change over a year ago
8
Higher Commodity Prices Continue Strengthening Terms of Trade
-7
-5
-3
-1
1
3
5
7
2007 2008 2009 2010f 2011f
310
340
370
400
430
460
490
520
550
Percent change over a year ago Reuters commodity price index
Commodity Prices (RHS)
f = IIF forecast
Latin America
Terms of Trade (LHS)
9
Capital Inflows Close to Record Levels
0
50
100
150
200
250
2007 2008 2009 2010 2011f
Total Capital Inflows Private Inflows Official Inflows
Latin America
$ billion
f = IIF forecast
10
Latin America
Risk-adjusted Returns on Sovereign Bonds Have Risen…
200
250
300
350
400
450
500
Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10
0
10
20
30
40
50Return (LHS) Volatility (RHS)
(EMBIG Latin, 30-day volatility)
11
…and Bond Issuance has Increased
0
25
50
75
100
125
150
2004 2005 2006 2007 2008 2009 2010
Latin America
$ billion
f = IIF forecast
12
Equity Investment is Leading Private Capital Inflows
-5
70
145
220
2008 2009 2010 2011f 2012f
Total Private InflowsDirect Equity InflowsPortfolio Equity Inflows
Latin America
$ billion
f = IIF forecast
13
70
90
110
130
Feb 07 Aug 07 Feb 08 Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11
BrazilChileColombiaLatAm
Latin America
Currencies Have Appreciated Back Toward Pre-Crisis Levels
(January 2007 = 100)
*US$ / local currency
14
Real Effective Exchange Rates Have Appreciated Even More
95
100
105
110
115
2007 2008 2009 2010 2011f
Latin America
Index 2000=100
f = IIF forecast
15
Brazil: As Inflation has Increased REER has Appreciated
140
145
150
155
160
Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11
4.0
5.0
6.0
Jan 2006=100 percent change oya
Latin America
Inflation
REER
LATIN AMERICA
Inflationary Pressures Rising/Currencies Appreciating: To Tighten or not to Tighten?
Carnegie International Economics Program
February 16, 2011
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