Chart: 2021 Latin American Interest Rates Rise amid Inflation Concerns

As economies continue their long Covid recoveries, central banks in parts of Latin America—notably Brazil, Chile, Mexico, and Peru—are raising interest rates. Back in March 2020, interest rates were set at record lows with the goal of circulating money to spur economic activity at the onset of the pandemic's economic impact. However, the region's largest economies are now confronting a changing economic environment featuring above-target inflation, motivating central banks to constrict access to capital and wind down the low-interest-rate party.

What’s causing the inflation? There are several factors and the strength of the effect of each varies by country. In general, they are experiencing inflation due to supply shocks and scarcities, growing domestic demand for goods, and rising prices for energy and foods. The rising prices of goods are compounded by the widespread droughts in countries such as Argentina, Brazil, and Mexico. There’s also considerable inflation in the service sector, which until now has had a slow reignition.

Still, not every country in the region is adopting a more contractionary monetary strategy. The central banks of both Argentina and Colombia are holding low rates steady. Further, there is concern that the rise of variants like Delta and Lambda will threaten economic recovery.

Central banks in the region are also watching to see what the U.S. Federal Reserve does in the coming months. Chair Jerome Powell said in late July that the Fed will hold rates at 0.25 percent until he sees improvements on unemployment and inflation. If and when the Fed decides to raise rates, emerging economies could feel an impact on investments.