Guatemala: Central Bank tightens financial conditions in May
The Monetary Board of the Central Bank of Guatemala (Banguat) hiked its monetary policy rate by 25 basis points from 1.75% to 2.00% at its 25 May meeting. The decision was unanimous.
In deliberating its decision, the Bank noted that inflation expectations for this year and the next have risen due to the fallout from the war in Ukraine, and the economic slowdown in China amid renewed Covid-19 lockdowns. Persistently high prices for commodities are behind the higher inflation expectations. Regarding the economy, the Bank noted that high-frequency data highlighted robust activity. This provided the Bank with room to tighten the financial belt.
The Bank’s statement was once again void of an explicit mention of the future direction of the monetary policy rate. However, in light of elevated inflation and greater upside risks to the inflation outlook, an easing of financial conditions is highly unlikely. Moreover, the Bank “seeks to keep inflation expectations anchored to the target, in an environment of growing external inflationary pressures”. The Bank also reaffirmed “its commitment to continue closely monitoring the evolution of the main economic indicators […] that may affect the general level of prices and, therefore, inflation expectations”.
The next meeting is set for 29 June.
Analysts at the EIU added:
“Guatemala is experiencing only mild price pressures relative to the rest of the region; this means that Banguat is unlikely to undertake aggressive monetary tightening, which should support economic growth. […] Although we expect further rate increases, they will be delivered in gradual 25-basis-point increments, as price pressures in Guatemala are likely to be milder than in the rest of Latin America. Our forecast that the interest rate will peak at 3.00% in 2023 therefore remains unchanged.”