The global economy has lately been characterized by high volatility, with supply shocks and growing geopolitical risks. But it has been beating expectations in 2023, especially in Latin America. Growth will be key in the region’s disinflation process.

In the past year, the global economy has been marked by inflation and interest rate hikes by central banks to put it in check. But the consensus is that Latin America has weathered monetary tightening quite well.

Central banks in Latin America reacted earlier and better than their counterparts in other regions, getting ahead of the changing interest rate cycles with forward-looking monetary policies. As a result, they’re already lowering rates in Brazil, Chile and Uruguay. And inflation has remained on a downward trend (half of which owes to core inflation alone) towards central banks’ target inflation. 

Right monetary policy

Santander Executive Chair Ana Botín praised Latin American central banks for their forward-thinking monetary policymaking to curb inflation. “It’s important to see that Latin America is well prepared for what is happening in this rate hike cycle,” said Botín in a press conference with Latin American journalists visiting the Santander Group City for the 20th Santander Latin America Meeting.  

Santander’s VP of Economic Research, Juan Cerruti, also called attention to how Latin America has been navigating this situation, with strong FX rates and continued GPD growth in most countries. “This time, things were different because of central banks’ early responses, sound commodity price levels and strong macroeconomic principles”, said Cerruti in a round-table with Banco Santander’s chief economists in Latin America. 

He believes the region has been able to cope with the changing rate cycle, in part, due to the macroeconomic landscape, as evidenced by strong external sector performance. Exports have tripled in 20 years, and direct foreign investment is at an all-time high. According to Santander’s Executive Chair, “in the next four years, Latin America will get more direct foreign investment than Asia”.

Central bank independence

Botín also pointed out the independence of the central banks in taking such quick and bold measures against rebounding inflation. “One of the most important things to investors — not only foreign investors but domestic investors, too — is robust institutions. Today, in Latin America, we have independent central banks,” said Botín before journalists from five Latin American countries. “We now have a well-regulated, supervised financial system with healthy levels of capital”, she added. 

It’s all a stark contrast to the 1980s, a so-called “lost decade” of development when Latin America was hit hard by the interest rate hikes led by then-US Federal Reserve Chair Paul Volcker, to contain spiralling inflation.

Latin America has drastically changed in recent years, with greater economic and institutional stability and central banks wielding considerable clout. “The challenge ahead will be lowering rates without losing monetary value, which could hinder disinflation”, Cerruti explained. And, as was pointed out in Santander’s 2023 International Banking Conference, growth will be key to make further strides.