Latin America Gears Up for Rate Cuts

Latin America is gearing up for a monetary policy easing cycle in a world with uncertain global economic direction. As economic activity weakens and inflation eases, central banks in the region are preparing for rate cuts. While global banking sector stress in the US and Europe has caused currency concerns worldwide, Latin American economies want to bring nominal rates down from double-digit levels. Brazil and Chile are expected to lead the charge shortly.

The Perfect Storm: Inflation Eases as Economic Growth Slows

Latin American economies raised rates earlier and more aggressively than other economies, but their cycle is set to reverse. As a result, major central banks in the region are looking to cut rates to bring them down to nominal levels. Above all, rate cuts will be made possible thanks to easing inflation. Although consumer price inflation was still high in most of the region in February, monthly data show clear signs of moderation, and disinflation is set to gather pace over the year. Additionally, economic growth has slowed dramatically from its January-June 2022 peak, indicating that the stage is set for rate cuts.

The Players: Who Will Cut Rates First?

Although not every economy in the region will be in a position to cut rates early or aggressively, Brazil, Chile, and Peru seem more likely to cut rates early, reflecting better inflation dynamics and more substantial concerns about growth. Mexico and Colombia will be more cautious, and their rates may not come down until the end of 2023 or 2024. Although policymakers in Mexico have not entirely kept in lockstep with the US Federal Reserve, they will be highly cautious about narrowing the interest-rate differential with the US.

The Risks: Currency Volatility and the Global Economy

The pace and extent of monetary easing will depend on currency movements stemming from the narrowing of the interest-rate differential with the US or growing investor risk aversion amid jitters over banking sector health in the US and Europe. While currency weakening has already been penciled into forecasts, any dramatic overshooting will cause central banks to re-evaluate monetary policy. Therefore, any more significant than the expected decline of the global economy could trigger changes in forecasted rate cuts.

Related Facts

• Costa Rica became the first Latin American economy to embark on a monetary easing cycle after raising rates sharply in 2021-22.
• Vietnam also cut rates in mid-March along with Costa Rica.
• Disinflation is gathering pace over the year as big Ukraine-related price spikes drop out of the index.

Key Takeaway

With inflation easing and economic growth slowing, Latin America is preparing for a monetary policy easing cycle. Although not every economy in the region will be equipped to cut rates early or aggressively, Brazil and Chile are expected to lead the charge. However, the risks of currency volatility, growing investor risk aversion, and economic weakening worldwide could impact the extent and pace of monetary easing.

Conclusion

In conclusion, the stage is set for rate cuts in Latin America as economic activity weakens and inflation eases. While some economies will move faster than others, better inflation dynamics and stronger concerns over growth will lead some economies, like Brazil and Chile, to be more aggressive in cutting rates. However, risks like currency volatility and a weak global economy could still impact the extent and pace of monetary easing.