Guatemala: Central Bank tightens financial conditions in June days after the government announces emergency package
June 29, 2022
The Monetary Board of the Central Bank of Guatemala (Banguat) increased its monetary policy rate by 25 basis points from 2.00% to 2.25% at its 29 June meeting. The decision was unanimous and marked the second consecutive hike, bringing the cumulative increase in the monetary policy rate since the Bank began its tightening cycle in May to 50 basis points.
Explaining its decision, the Bank stated that both inflation and inflation expectations for this year and next were continuing to increase. This is due to the increasing raw material costs provoked by the war in Ukraine, as well as prolonged global supply bottlenecks. Meanwhile, the monetary policy authority noted that high-frequency data continued to point to robust economic growth this year, with the Bank expecting the economy to expand between 3.0% and 5.0%. According to the bank, this gave it leeway to raise rates to get a handle on inflation without slowing activity sharply.
While the Bank’s statement was largely void of an explicit mention of the future direction of the monetary policy rate, it reiterated that the Bank would continue to seek to keep inflation controlled and inflation expectations anchored at the Bank’s 3.0–5.0% target range. As such, our panelists expect the Bank to hike the monetary policy rate further by year-end.
The next meeting is set for 31 August.
On 16 June , the government announced an emergency plan to cool inflationary pressures. It will cost USD 865 million (around 0.8% of GDP) and includes food, fuel and electricity subsidies for households.
Regarding the emergency package, analysts at the EIU commented:
“Against this backdrop, the government's announced national emergency plan is a net positive. In conjunction with Banguat's monetary-tightening cycle, the package should help to limit the second-round effects of supply-side shocks and anchor inflation expectations in the coming months. If price pressures prove stickier than we anticipate, there is still a possibility that the government could roll out additional support. However, given that Guatemala is not suffering from serious fiscal imbalances, we would not regard a temporary increase in spending pressure as a cause for concern.”
Author: Jan Lammersen, Economist