With Chile and Brazil first, Latin American central banks are already thinking of lowering rates

Declining inflation rates in the Latin American economies allowed most of the central banks put a stop to the cycle of tightening the cost of credit and, in cases such as Chile and Brazil, analysts are betting on cuts in interest rates in a matter of weeks.

The region embarked on an aggressive series of rate hikes in 2021 to contain runaway inflation following bottlenecks in global production chains, rising food costs, and the effects on prices of monetary and fiscal measures taken to respond to the economic blow of COVID-19.

Although Uruguay already led the way with a 25 basis point rate cut in April, Latin America’s big central banks are now nearing the time when they anticipate rate cuts, after the Federal Reserve adopted a “pause” of the bullish cycle. The markets estimate that Chile could go first as of next month.

“Although core inflation moderated a bit slower than expected, the consensus (to lower rates) is in July and market prices already have that expectation of a 100 basis point cut.he told Reuters. Cesar Guzmanmacroeconomic strategist at security groupbased in Santiago.

The underlying inflation of the mining country, a reading considered a better parameter to measure the trajectory of prices because it eliminates items of high volatility, is still well above 9% year-on-year, although it presented limited variations in recent months.

The Central Bank of Chile left its key rate unchanged at 11.25% last week, as expected, but said it could begin a process of reduction in the short term if recent trends continue.

In Brazil, the Central Bank on Wednesday maintained the Selic reference rate at 13.75%, a maximum of six years, and removed from its statement a reference to the possible resumption of the adjustment cycle if the disinflation process goes off course, leaving the way open for a possible drop in August.

The governing body, which in its last message requested “patience” to see the results of monetary policy, faces pressure from the government of President Luiz Inácio Lula da Silva to start reducing rates and collaborate in GDP growth.

“There is no reason for the rates stand at 13.75%”, said Lula, in a new call for cuts.

All in all, estimates point to August for a first cut and market surveys calculate that the Selic rate could reach 12.50% by the end of the year, a sign of future relief from highly restrictive monetary conditions in the largest Latin American economy.

“We expect the central banks of Latin America to be the first to cut rates globally because there were several internal dynamics that have favored the region.“, said Joan Domenesenior economist for Latin America at Oxford Economics.

Mexico and Colombia trailing behind

Although central banks are already considering the expected turn of policy, Happy Rauleconomist at the study center CIDE in Mexico, he says that this does not imply that conditions will cease to be restrictive, given the tight labor market and very high underlying inflation rates.

A Goldman Sachs report released this month noted that Latin American nations have already seen the end of rate hikes and are now getting ready for a turnaround in the cycle.

Argentina It continues to be a case apart, although Goldman considered that there would be room for future easing – from an exorbitant referential rate of 97% – given that inflation has dropped slightly. The Argentine central bank decided this month to leave the key rate stable.

So now I would continue Peru with a probable cut in rates in August, according to analysts, and towards the end of the year it would be the turn of Mexico and Colombia, where the authorities of the central banks express greater caution.

“Unlike other Latin American countries, the Bank of Mexico may not be the fastest to cut rates or the one that will do so to a greater extent, but we do believe that it may have some drop on the horizon”, said Marcos Arias, an analyst at Grupo Financiero Monex.

At their meeting last Thursday, the Bank of Mexico kept its referential rate stable at 11.25% and adopted a tone “conservative”, according to Goldman analysts, warning that it will be necessary to maintain the level for a long time because the inflationary panorama continues to be complex.

In Colombiathe fourth largest economy in the region, inflation surprised downwards in May and the 12-month accumulated rate hit its lowest since October, raising expectations that the central bank will end its upward cycle.

“I think we’re all hoping that the adjustment they made last time was the last one, plus it was a split decision.”, said Andrés Pardo, director of strategy for Latin America at XP Investments, regarding the April decision of the Banco de la República de Colombia to raise the rate by 25 basis points to 13.25%.

“Colombia and Mexico will be the last to reduce rates, possibly in the fourth quarter of this year“, he claimed.

Source: Reuters