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 they anticipate rate cuts, after the Federal Reserve took a “pause” from 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. César Guzmán, macroeconomics strategist at Grupo Security, based in Santiago, Chile.
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% per year, although it has presented limited variations in recent months.
The Central Bank of Chile left its key interest rate unchanged last week at 11.25%, as expected, but said it could begin a process of reduction in the short term if recent trends continue.
In Brazil, the Central Bank last 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 an eventual decline in August.
The governing body, which in its last message asked for “patience” to see the results of the monetary policy, is facing pressure from the government of President Luiz Inácio Lula da Silva to start reducing rates and helping increase GDP.
“There is no reason for rates to be 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 central banks in Latin America to be the first to cut rates globally because there have been several internal dynamics that have favored the region,” said Joan Domene, senior Latin America economist at Oxford Economics.
Mexico and Colombia trailing behind
Although central banks are already considering the expected policy shift, Raúl Feliz, an economist at the CIDE think tank in Mexico, says that this does not imply that conditions will stop being 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 continues to be a case apart, although Goldman considered that there would be room for future relaxations – from an exorbitant referential rate of 97% – given that inflation has had a slight decrease. The Argentine Central Bank decided this month to leave the key rate stable.
Thus, now Peru would continue with a probable rate cut in August, according to analysts, and towards the end of the year it would be the turn of Mexico and Colombia, where the central bank authorities are expressing greater caution.
“Unlike other Latin American countries, perhaps the Bank of Mexico will 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 a drop on the horizon,” Marcos said. Arias, an analyst at Grupo Financiero Monex.
In its meeting last Thursday, the Bank of Mexico kept its reference rate stable at 11.25% and adopted a “conservative” tone, according to Goldman analysts, warning that it will be necessary to maintain the level for a long time because the inflationary outlook continues to be complex.
In Colombia, the fourth largest economy in the region, inflation surprised downwards in May and the 12-month accumulated rate reached its lowest level since October, raising expectations that the central bank will end its upward cycle.
“I think we are all hoping that the adjustment they made last time was the last one, and it was also a divided decision,” said Andrés Pardo, director of strategy for Latin America at XP Investments, regarding the April decision of Banco de la Republic of 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 said.
