Rising inflation has forced major LatAm central banks to hike forcefully. A bottom-up analysis of inflation shows that the inflation surge has been broad-based across CPI baskets, suggesting demand-pull factors. Sustained inflation momentum in Mexico is tough to reconcile with the weak recovery. 

We project moderate current account deficits despite strong imports. Nonresident capital flows will rebound this year, particularly in Brazil and Chile, and foreign reserves will improve supported by IMF SDR allocation. We see capital flows gradually slowing amid tighter global liquidity conditions.

LatAm central banks have accelerated monetary policy normalization. We expect Brazil and Andean countries to hike faster than market expectations, with Mexico remaining more dovish amid a negative output gap. Risks are tilted up due to potentially worsening global conditions and higher fiscal risk.

LatAm countries have been forced to partially extend fiscal policy support this year amid increased social demands. Maintaining some stimulus while sustaining investor confidence has proven challenging. Fragile public finances could result in undue pressure on monetary policy, weighing on growth. 

Base metal prices have far exceeded our initial forecasts, supported by low inventory. We expect average base metal prices to be 44% higher in 2021 and decline by 5% in 2022 as some supply constraints ease.