Alphacast Highlight - Monetary tightening amidst soaring inflation
By Matías Carugati (matias@alphacast.io)
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With the pandemic shock well behind, central Banks worldwide have been reacting to the inflation surge. The monetary policy tightening started early last year and has continued since. The number of central banks increasing their policy rate is even higher than in the previous cycle, just before the global financial crisis. Not surprising, considering that inflation has soared to numbers not seen in decades.
Policy reaction in developed economies has been relatively recent, with most relevant central banks moving in 2022. Compared to previous tightening cycles, though, their reaction seems more abrupt. However, more action will likely be required. Policy rates are still below the levels they had before the global financial crisis, with inflation pressures not subsiding over the short term. Keeping the expectations well-anchored will require decisive action by central banks.
Developing economies, and Latin American ones in particular, have moved with more emphasis. The tightening started sooner and was stronger than in developed economies. In part, because inflation rose to higher levels and expectations are not as well anchored. But also because the IT regime that most banks follow requires to maintain credibility. It is possible that monetary authorities over-react to signal commitment to low and stable inflation. Specially, considering fiscal dynamics after the Covid-19 shock.
