The region is set to experience a sharp downturn this year as lockdowns pummel activity. Considerable job and income losses will hit household spending, while heightened economic uncertainty will hammer investment activity. Moreover, disrupted value chains and low demand for commodities will squeeze exports, while weak fiscal positions further cloud the outlook. Regional inflation inched up to 6.2% in August from 6.1% in July, mainly driven by stronger price pressures in Brazil and Mexico. Notably, however, consumer prices fell at the sharpest annual rate in over two years in Ecuador. This year, inflation will hover well below 2019 levels, contained by a pronounced drop in domestic activity and low global oil prices.
The central banks of Colombia and Mexico slashed their policy rates again over the past month to further soften the economic impact of the pandemic. Meanwhile, the central banks of Chile, Paraguay and Peru kept their policy rates unchanged. Looking forward, monetary policy stances are poised to remain expansionary through year-end. Most regional currencies appreciated against the USD in recent weeks, amid Fed Chairman Jerome Powell’s announcement of a major policy shift. The Mexican peso also benefited from a lean budget and a cautious monetary policy stance, while an improving economic situation supported the Brazilian real. That said, currencies will weaken this year, due to the Covid-19 pandemic.