Benjamin Souza is the director of Fixed Income Strategy for Latin America at BlackRockconsidered the world’s largest asset management company.
The executive evaluates, in an interview with Portfolio, the impact of inflation and the rise in rates on fixed-rate investments and loans.
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Will interest rates stop rising soon?
We had a period of low rates and that was a problem to invest. Inflation is more serious in some countries and although in the United States it is still at 6%, it is three times higher than the target. Where it is higher, decisions will be more difficult for central banks.
Just as there was a race over who could raise rates the fastest, now the race is over who manages to control inflation. Some central banks are going to take time to succeed, but all will have to take a break to assess what happened, the effect of the measures and how much it affects demand, to eventually start lowering them. On average, it’s 12 months from when they finish uploading and they haven’t finished uploading them.
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So the cost of money will still be there for a while longer?
That is why 2023 is the perfect scenario for fixed income. We’re going to stay there for a while. It will take a while yet. The reason is inflation. We are going to be forced by that double-digit inflation and I think that the problem is not solved and we are not close to solving it.
Why did inflation skyrocket?
For three reasons: China’s zero covid policy, which generated inflation of goods due to the closure of cities and regions; the second is due to Russia’s invasion of Ukraine, which distorted the prices of some goods such as grains and fertilizers, and the third is domestic and is the demand with the post-pandemic recovery. The one that is being resolved is the first one.
Unfortunately we are all going to be left with a little more inflation and learn to live with it. No central bank can be content with double-digit inflation and has to push. In the rest of the region’s countries, we probably have to learn to deal with these inflations despite the objectives of the central banks and live close to the ranges, perhaps in the upper part of them.
(Further: Demand for credit slowed down: these are the reasons, according to Banrep).
The other side of the coin is credit, with high rates. Will those who are in debt suffer it here?
Unfortunately, the credit channel, by affecting demand, will have to be controlled so that it does not deteriorate. The cost of financing, which generates friction in the economy, must be monitored. For the region, the recovery of China and the better result that the US is having will be positive.
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How to make a good pension reform?
Throughout Latin America we seek to create a sustainable system. The good thing is that there is a history of how it has been done in other countries and the important thing is to see that these savings have been converted into investments that have benefited the country, but at the end of the day you have to analyze how the system could be improved.
It is natural for countries to make reforms to pension systems. Savings are converted into investments for the development of countries in infrastructure, companies or government bonds.
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