Latin rates set for year-long easing

30/03/2009 | Thierry Ogier, Lucien Chauvin

The cycle of monetary policy loosening that has gained pace in Latin America is likely to go on until the end of the year.

The cycle of monetary policy loosening that has gained pace in Latin America is likely to go on until the end of the year.
Although policy-makers are keeping their cards close to their chests, there is a consensus among analysts that the loosening will continue.
That may help stem the impact of the global economic crisis in a region where fiscal constraints limit the margin for governments to engage in US- or European-style anti-cyclical fiscal policies.
Guillermo Mondino, head of Latin America research at Barclays Capital in New York, said he had greater belief in central banks than in fiscal policy. Monetary policy “allows for a more aggressive easing than the potential for countercyclical fiscal policy”.
Julio Velarde, president of the Peruvian central bank, said central banks “are more aggressive and stronger” than they used to be.
Latin central banks have lagged behind their counterparts around the world in easing monetary policy, due to concern over the pass-through of rising commodity prices last year to inflation.
Even countries like Brazil that pursued a distinct restrictive monetary policy in recent years have recently promoted a series of aggressive cuts in the benchmark Selic rate.
Maria Celina Arraes, deputy governor of the Brazilian central bank, declined to comment on policy details, but said: “We cut down, because our inflation models and market expectations pointed to a decrease.”
Earlier, Henrique Meirelles, the governor of the bank, told reporters [in Brazil] that it was the first time in more than a decade that the central bank is in a position to promote an interest rate cut in the midst of an international financial crisis.
“In 1997, interest rates were raised to 43%,” he told the American chamber of commerce in Sao Paulo recently. “In 2003, real interest rates were at 17%, now they are at 5.2%.”
Brazil cut its base rate twice this year, by a total of 250 basis points (bps), to 11.25%.
Mondino pointed out: “Central banks have started promoting cuts. We have very aggressive cuts now in most countries, very aggressive in Chile, Brazil and Colombia. Banxico in Mexico is starting to catch up after a slow start.”
Mexico has cut its base rate by 150 bps since the beginning of the year. Chile was most aggressive, and slashed its base rates by 600 bps.
The Institute of International Finance said in a report: “The trend is expected to be extended during the coming months. We believe that by the fourth quarter of 2009, interest rates in a number of countries are likely to be well below a neutral level, and to remain so well into 2010.”

Related stories

  • Making the bond markets work for CEE infrastructure

    If the central and eastern European countries’ vast infrastructure investment gap is ever to be bridged, then private capital via the bond markets will have to be harnessed

  • CEE urged to tap Asia for DCM lessons

    The gap between infrastructure needs and investment in Central and Eastern Europe shows why the region needs to learn lessons from Asia on how to build deep debt capital markets, according to leading bankers

  • Exports, not invasion, biggest Russian risk for Lithuania

    Rimantas Šadžius, Lithuania’s finance minister, tells Emerging Markets how Russia’s weak economy and currency are making conditions tough for the Baltic country, but that reliance on Russian energy is falling.

  • Crisis ahead for Croatia without dramatic changes, warn ...

    A terrible cocktail of a vast debt pile, large fiscal deficit and lack of growth has pushed Croatia’s debt profile precariously close to unsustainable levels. Without comprehensive structural reforms, many believe the country’s economy will be in crisis by the end of the decade.

  • Ukraine taps private sector and Georgia to reform conflict ...

    President Petro Poroshenko and premier Arseniy Yatsenyuk have dipped into Georgia’s deep pool of reformist talent in an effort to rebuild Ukraine’s war-ravaged economy. However, even with a vast IMF package and other financial assistance, many have trouble seeing how Ukraine is ever going to return to growth while it is in conflict with the Russia-backed rebels in the east

Editor's Picks

In Focus

  1. Georgian jewel shines bright against Russian darkness

  2. Ukraine taps private sector and Georgia to reform conflict-ravaged economy