Market Round-Up

Two of South America's largest economies, Argentina and Brazil are currently discussing plans to create a common currency in a bid to reduce their dependency on the US dollar. A common currency is a single monetary system, such as the Eurozone, which can be used and adopted by many economies for all transactions. 

The advantages of countries adopting such systems include greater economic integration among the involved countries, encouraging price stability and inflation control through a centralised monetary policy. The transition could also provide better trade movement for the nations involved by eliminating much of the exchange rate volatility typically seen within South American economies.

Although talks are in the early stages, many analysts are sceptical of the proposal due to the discrepancies between the two economies. This is especially true when considering the economic stability within both countries. Argentina is currently experiencing inflation rates close to 95% and is largely cut off from international debt markets, following a 2020 default from which the country still owes more than US$40bn to the International Monetary Fund (IMF). In contrast, Brazil is experiencing much lower levels of inflation, at 5.8%, and fewer debt issues, but still has underlying economic issues. If the plan were to go ahead, the move would mean each country would lose the freedom to dictate their monetary policy and thus inflation levels as they would be done so centrally. Therefore, although talks are in the early stages, the stability of a common currency is likely to be uncertain given the differing economies at present. 

According to the Office for National Statistics (ONS), UK public sector borrowing saw the highest December levels since monthly records began in January 1993, roughly £16.7bn greater than in December 2021. Such increases in spending were largely due to higher interest costs on current debt, which have risen sharply since mid-2021 largely as a result of higher inflation, with the interest payable on index-linked government bonds rising in line with the Retail Price Index. The household energy support scheme has also pushed public sector borrowing up as the government continues to support those most impacted by high energy tariffs. But the coupling of December’s worse-than-expected public finances with rising inflation and weakening economic sentiment, will likely put pressure on the chancellor to maintain a tight grip on public finances as we nudge closer to the next government budget on the 15th of March.

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