Last week, the Central Bank of Peru cut rates by 1% to 5%. While Peru grew almost 9% in 2008, we expect the country to post a modest, but positive, growth rate of 4% in 2009. Cleary, the fact that inflation is converging to the target and consumer spending is slowing down are factors that contribute to explain the latest monetary policy decision. Peru is in extremely good fiscal shape and indeed can afford to experience further rate cuts.
In our view, Banco de Mexico will cut its key rate to 6.25 percent from 6.75 percent at a meeting on April 17. The bank began reducing its benchmark rate in January from 8.25 percent.
Mexico is among the most affected countries with the global financial crisis. Both because of its geographical proximity to the US as well as its economic dependency to the US trade (NAFTA). Clearly, the sudden decline in remmittances from the US to Mexico also explains the fact that Mexico's output should decline by 2% in 2009.
While the IMF loan to Mexico has helped boosting confidence in the economy, it remains to be seen whether such measure will be enough to indeed restore the confidence levels of investors in Mexico
In the last week of April, it seems consensual that the Copom will implement one more round of interest rates cuts. This will possibly the third time that the Copom implement a rate cut. In our view, the Copom might implement a rate cut to 10.25%. However, despite the monetary easing, the country should experience a recession in 2009 with output contracting by 1%. In 1990, the country experienced the worst recession ever. This time, the situation will not be as bad. There is no lack of liquidity in the economy. Industrial production is slowing down but there is no lack of confidence in the economy (as we had in 1990). International reserves are extremely high. The country has a flexible exchange rate with a high degree of mobility in the capital account. In brief, for us it seems that the recession will hit a better Brazil, with more solid macro economic fundamentals than the one we witnessed in 1990.