Latin America could lead rate cuts after record monetary tightening; see analysis – 06/26/2023 – Market

Latin America’s major central banks, which have led some of the most aggressive monetary tightening over the past two years, may now be poised to lead the world in rate cuts amid clear signs of slowing inflation in countries such as Brazil and Chile.

The potential tipping point comes even as the Federal Reserve and the European Central Bank signal that further rate hikes may be on the horizon, and the Bank of England surprised many investors by raising rates by 0.5 percentage point last week.

Latin America entered at the beginning of 2021 one of the sharpest monetary tightening cycles in the world to contain inflation fueled by obstacles in the global production chain, rising food prices and side effects of the fiscal stimulus measures used to alleviate the impact economy of the Covid-19 pandemic.

That means interest rates are already sky-high _ 11.25% in Chile and Mexico and 13.75% in Brazil_ with more room for cuts.

“We expect Latin American central banks to be the first to cut rates globally because there are a number of domestic dynamics that have benefited the region,” said Joan Domene, senior economist at Oxford Economics, citing stronger-than-expected economic activity and slowing inflation.

Goldman Sachs analyst Alberto Ramos wrote in a June note that the region was seeing “gradual but steady and broad” progress in inflation, including core core prices, which could signal a “policy shift ahead ’, though cautiously.

Uruguay already cut interest rates by 25 basis points in April. Chile is likely to cave as early as next month, with Brazil potentially following in August.

Chile’s central bank kept its key interest rate unchanged at 11.25% last week, but said that if recent positive trends continue, it could start to cut the rate in the near term.

Forecasts point to a rate cut next month, said Cesar Guzman, a macroeconomic analyst at Grupo Securities.

“The market has already priced in the expectation of a 100bp cut,” he said.

In Brazil, the Central Bank kept the Selic rate unchanged last week for the seventh consecutive time, although it adopted a milder tone regarding future measures, excluding the possibility of future hikes in its communiqué.

The Brazilian financial market showed that many operators are betting that the BC will start a cycle of monetary easing in August, while President Luiz Inácio Lula da Silva continues to insist that the monetary authority reduce interest rates to stimulate growth.