How long can Latin America resist higher inflation and interest rates?

Unrelenting inflation and interest rate hikes are set to restrain growth in Latin America, writes Pollyanna De Lima, from S&P Global Market Intelligence


Latin American nations displayed considerable economic resilience during the second quarter of 2022, according to S&P Global’s PMI data, despite significant global headwinds. The outlook remains cloudy, however, as the war in Ukraine and sanctions imposed on Russia continue to exacerbate price pressures, thereby underpinning monetary policy tightening. Other challenges include ongoing disruptions to supply chains and political uncertainty, while the cost-of-living crisis and rising interest rates are expected to restrict consumption and investment.

In the opening quarter of the year, gross domestic product in Brazil, Colombia and Mexico all expanded by 1.0% from the preceding period, with only Mexico having failed to see a return to pre-pandemic levels. Since then, our timelier indicator — the Purchasing Managers’ Index (PMI) — strengthened and thereby signalled a more robust performance for the second quarter.

Despite a challenging global economic environment, and in line with stronger PMI results for Q2, our full-year forecasts for 2022 have been revised higher. GDP growth is expected to hit 6.2% in Colombia and 1.5% in both Brazil and Mexico. Included in the forecast assumptions are expectations of a slowdown in growth towards the end of the year, as higher borrowing costs and surging inflation dampen consumption and investment. On the monetary policy front, we anticipate year-end policy rates of 13.5%, 8.5% and 9.5% in Brazil, Colombia and Mexico respectively.


PMI data for Brazil showed a remarkable economic performance during the second quarter, as June saw private sector output expand at the second-fastest rate since comparable data became available in 2007. The service economy continued to lead the recovery, although manufacturing production rose substantially midway through 2022.

A near-record upturn in demand for services supported an unprecedented rise in employment and the joint-fastest expansion in business activity since the series started in March 2007 during June.

Growth lost momentum in the manufacturing industry, but remained strong by historical standards. Price pressures reportedly dampened demand for goods which in turn led to a softer increase in production.

Input costs continued to surge at manufacturers and service providers, with the aggregate rate of inflation little-changed from May’s record. Price pressures again led companies to lift selling prices in June, with the overall rate of increase climbing to a new peak for the fourth straight month.

It appears that inflation has not yet peaked in Brazil, even with the central bank pursuing one of the most aggressive monetary policy tightening worldwide. The SELIC, which is currently at a five-and-a-half-year high of 13.25%, is widely expected to increase further.

Notwithstanding global and domestic uncertainties, Brazil’s economy is forecast to expand 1.5% in 2022, with consumer price inflation predicted to average 10.7% and the policy rate to end the year at 13.5%.

Firms in our PMI panel provided their own assessments for growth prospects during our latest Business Outlook survey conducted in June. Although confidence towards output remained elevated, soaring inflation expectations led to downgrades to profits sentiment and investment plans.


In June, manufacturing production in Colombia rose at one of the strongest rates seen since PMI data became available in April 2011, amid favourable demand conditions, product diversification and stock-building initiatives. Buoyed by demand resilience, companies hired additional workers at a record pace in June.

The news of ongoing job creation bodes well for the labour market, with the official unemployment rate expected to recede further after falling for four months in a row (to 10.6% in May).

Survey data also showed that inflation rates remained historically high in June amid lingering issues in supply chains, global shortages of inputs, the war in Ukraine and lockdowns in China. With consumer price inflation showing no signs of abating, the central bank hiked the policy rate by 150 basis points to 7.5% on 30th June. This is the highest figure since January 2017.

We forecast further increases in interest rates in 2022, with the policy rate expected to end the year at 8.5%. Inflation is predicted to average 8.9%, while economic growth of 6.2% is anticipated.


Mexico’s economic recovery quickened in the opening quarter of 2022, though output is yet to return to pre-pandemic levels. PMI data for the second quarter indicated that growth gathered momentum, with the headline figure at its highest mark in over three years during June.

Survey participants indicated that a mild recovery in factory orders, aided by sustained growth of international sales, underpinned higher production volumes, job creation and a solid rebound in input buying halfway through the year.

Input cost inflation was only a tick lower than in May, thereby being at its third-highest mark since data collection started in April 2011. Panellists attributed price pressures to input demand and supply mismatches, the war in Ukraine and energy price volatility.

Consumer prices rose at an annual rate of 8.0% in June, the strongest pace in over 21 years. Soaring inflation prompted the central bank to lift the policy rate further in June. At 7.75% the interest rate was at its highest since October 2019. S&P Global Market Intelligence anticipates that the policy rate will stand at 9.5% at the end of the year, with inflation forecast to average 7.6%. Finally, GDP growth of 1.5% is predicted for 2022.