(Bloomberg) — Three of Latin America’s key economies plan to keep easing monetary policy after delivering another round of interest rate cuts on Wednesday, in sharp contrast with Federal Reserve signals that US borrowing costs may only fall after March.
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Brazil lowered the benchmark Selic rate by half a percentage point for the fifth straight time and promised to keep the same easing pace for the next two meetings at least. Chile delivered a jumbo cut of 100 basis points while Colombia lowered rates by a quarter-point, both of which were split votes with the minority backing faster easing.
By contrast, Fed Chair Jerome Powell reinforced that there’s no rush to lower rates by saying it’s “unlikely” they will reach the level of “confidence” needed to cut in March. Traders pared the odds of a reduction that month to 30% after he spoke, from over 60% earlier in the day.
Latin American central banks are pulling away from their counterparts in advanced economies, reaping the benefits of early and aggressive monetary tightening campaigns in the wake of the pandemic. Their easing cycles reflect confidence that inflation will slow to target as demand cools. Still, they are keeping an eye on price pressures that may come from extreme weather caused by El Nino and weaker currencies.
“There is room for Latin American central banks to ease gradually ahead of the Fed given very restrictive monetary stances and much more favorable current and prospective inflation outlooks,” said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc.
Chilean swap contracts, which reflect investor sentiment toward monetary policy, fell across the curve in Thursday morning trading, while the peso weakened 1% to the lowest in over three months. Colombia’s peso strengthened 0.3%, and Brazil’s real fell 0.1% with local traders having already priced in a gradual easing cycle.
In Brazil, central bankers led by Roberto Campos Neto lowered rates to 11.25% just days after a report showed annual inflation slowed for a third straight month in early January, and much more than expected by economists. In a statement, policymakers pointed out that measures of core inflation, which exclude volatile items, are “closer” to their target.
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“Brazil’s central bank avoided any surprises in its rate decision and tone of the post-meeting statement. We see additional half-point cuts at the next two meetings before shifting to smaller cuts, with a year-end policy rate of 9%.”
— Adriana Dupita, Brazil and Argentina economist
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Chile’s borrowing costs have now tumbled by four percentage points to 7.25%. Board members say inflation will slow down to the 3% target sooner than expected. They also signaled rates will reach a neutral level of around 4% — which neither stimulates nor restricts the economy — during the second half of the year.
In Colombia, central bank Governor Leonardo Villar told reporters that policymakers were cautious in their decision out of concerns of having to stop or even reverse cuts in the future if inflation rebounds. Still, all board members backed a reduction, and the key rate fell to 12.75%. Two had voted for no change in the prior meeting.
What Bloomberg Economics Says
The Colombian central bank’s 25-basis-point rate cut on Wednesday shows policymakers remains cautious, but the vote breakdown and post-meeting statements were more dovish than in December. The Chilean central bank’s outsize interest-rate cut and dovish forward guidance on Wednesday signal policymakers will bring down rates faster than they had anticipated in December.
— Felipe Hernandez, Latin America economist
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For Latin American central banks, the question over the next few months will be how fast and by how much they will cut interest rates.
“They are not tied to the Fed at this initial stages of easing but the Fed Funds path will be key for how low Latin American central banks can go,” said Ramos, from Goldman Sachs.
–With assistance from Oscar Medina, Carolina Gonzalez, Giovanna Serafim, Rafael Gayol and Davison Santana.
(Updates with market reaction in sixth paragraph)
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