The Bank of Spain warns of a credit contraction in Latin America

He Bank of Spain points out that the process of relaxing monetary policy in Latin America has not been accompanied by an improvement in financial conditions in recent months, a situation that could worsen if the Federal Reserve of USA decided to raise interest rates.

In its semi-annual report on the Latin American economy published on Monday, it explains that despite the rate cuts in the region, financial conditions have become strained again since March due to the unfavourable evolution of the cost of public debt in Latin America and the deterioration of public finances in some countries.

Using data from Brazil, Mexico, Chile and Peru, he makes an exercise according to which a 1 percentage point increase in interest rates in the United States would lead to a reduction of 1.8% credit granted by Latin American banking entities.

If the 1 point rate hike came from Latin American central banks, the credit cut would only be 0.42%while no significant evidence is found that a tightening of the European Central Bank’s monetary policy would significantly affect credit granted by Latin American banks.

According to the study, futures markets are already anticipating few additional rate cuts in Brazil, Chile and Peru, the countries that started the monetary easing process earlier, while they would have a longer run in Colombia and Mexico, although in the latter case the magnitude would be reduced.

Monetary policy will depend on inflation, which is expected to continue to decline in a context in which economies would grow at rates close to their potential, although there remains the risk of still high inflation in services, particularly in Mexico and Colombia, which is resisting a decline, a common feature on a global scale.

Latin American economies are expected to grow at rates close to potential growth in 2024, which would mean a slowdown compared to 2023 in Brazil and Mexico and an acceleration in Chile and Colombia, which had recorded low growth in 2023, and in Peru, affected by negative supply shocks.

Growth is being supported by the resilience of the labour market, the process of lowering official interest rates, the increase in the price of raw materials for some producing countries and the reduction in uncertainty about economic policies in some countries.

The main external downside risks to economic growth are a more restrictive-than-expected US monetary policy and a more rapid slowdown in the Chinese economy, for example due to a worsening of the difficulties in its furniture sector.