Date: June 16 and 17, 2008 Location: Miraflores Park Hotel, Lima - Peru Overview: The Central Reserve Bank of Peru and the Office of the Chief Economist for Latin America and the Caribbean Region of the World Bank jointly organized the international conference "The Global Rise in Food Prices and the US Slowdown: Issues and Challenges in Monetary Policy" held in Lima, Peru, on June 16 and 17, 2008. The conference was attended by representatives from at least a dozen central banks in the region. A few market analysts, academics, and representatives from international financial institutions also attended. The purpose of this conference was to discuss the challenges that Latin American central bankers face in view of the recent sharp increases in energy and food prices that are creating new inflationary pressure in LAC and around the world. Main outputs: The discussion underscored the burden that Latin central banks face in avoiding second round effects of commodity price inflation in an international environment characterized by low interest rates in the US (favoring carry trade inflows to LAC and other emerging markets) and buoyant demand in China. The current juncture was seen by many as the first major test for the new inflation targeting regimes (established over the decade in Brazil, Chile, Colombia, Mexico, Peru, and Guatemala). Indeed, headline inflation is rising in virtually all Latin countries (running above target in many of them) and core inflation is also on the rise. Participants recognized that a tighter monetary policy stance could have negative short term effects on countries’ competitiveness because of capital inflows and could be politically costly. However, there was a strong consensus that the region cannot afford the luxury of losing control of inflation so that monetary tightening can neither be avoided nor postponed. Hence, all inflation targeters, as well as many other countries, have begun raising interest rates significantly. However, there were concerns that some central banks might have fallen behind the inflation curve so that some wage-price spirals and some unhinging of inflation expectations cannot be ruled out. The preliminary results of a research project commissioned by LAC CEO (led by Roberto Rigobon, from MIT) suggest that, while the manner in which different consumers are affected by high commodity prices is country specific, in all countries in the sample the pass through of energy prices is much faster than that of other commodities. This means that the inflationary pressure of high food prices could be long lasting and that inflation targets are likely to be missed in many countries for several months into the future. This raised the premium on central bank pro-activeness to curb inflation expectations. It was also noted that the political economy of monetary policy tightening is more complicated in countries with a negative output gap (i.e., actual GDP growth running below potential growth), where higher interest rates would be pro-cyclical; and in countries experiencing significant terms of trade losses, where a fall in real wages is likely to be required. Inflationary pressures have important redistributive effects and are likely to increase poverty in many countries in the region, particularly in the net food and fuel importing countries (located mainly in Central America and the Caribbean) that have, as a result, less ability to tax and transfer. The key challenge in this regard would be for fiscal policy to provide safety nets for the poor without exacerbating existing inflationary pressures, a task much more difficult to achieve where a decline in real wages is required as part of macroeconomic adjustment. There was also consensus that the uneven distributional consequences of the pass through of higher food and fuel prices to the domestic economy significantly complicate the communication between central bankers and the society. In this context, the burden of communication and policy action had to be distributed appropriately between monetary and fiscal authorities -- monetary authorities focusing on the long-term social gains of price stability; fiscal authorities focusing on addressing social equity issues through the provision of targeted support to those who need the most. Program Organizers:
Cesar Calderon, World Bank (ccalderon@worldbank.org)
Tito Cordella, World Bank (tcordella@worldbank.org)
Contact: Ruth Delgado, World Bank (rdelgado@worldbank.org)  Agenda: Click on the link to get the agenda of the conference.
List of Participants: Click here to get the list of participants in the conference. Presentations:
First Session: Understanding the nature of recent increases in food prices
Charles Collyns, IMF
Roberto Rigobon, MIT Second Session: Formulating monetary policy: Constraints trade-offs and options
Alain Ize, World Bank
Stephen Murchison, Bank of Canada Third Session: LAC Country experiences I
Carlos Hamilton Vasconcelos Araujo, Central Bank of Brazil
Jorge Toro, Central Bank of Colombia
Roger Madrigal, Central Bank of Costa Rica Fourth Session: LAC Country experiences II
Manuel Ramos Francia, Bank of Mexico
Adrian Armas, Central Reserve Bank of Peru
Pablo García, Central Bank of Chile Fifth Session: Latin America in Today's Global Economy
Eduardo Levy Yeyati, Barclays Capital
Alberto Ramos, Goldman Sachs
Alfredo Thorne, JP Morgan Chase
Gustavo Cañonero, Deustche Bank Roundable: Policy Responses to Global External Conditions
Walter Cancela, Central Bank of Uruguay
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