Friday, June 19, 2009

Monetary Policy Decisions in Latin America

Ever since the beginning of the current financial crisis, Latin American countries started decreasing domestic interest rates. Indeed, such actions were correct, especially considering that some Central Banks are extremely conservative, that is they care a lot about inflation and inflation expectations. Given the severety of the current crisis, however, lower interest rates is the correct action. However, given the signs in the US that the current financial crisis might be coming to an end it may be the case that the Latin central banks may stop decreasing interest rates soon. In what follows we provide a brief overview of the key Central and their policy actions.

In Mexico, the Central Bank cut its benchmark interest rate for a sixth consecutive month in a bid to bolster the country’s flagging economy. The bank lowered the key lending rate a half percentage point to 4.75 percent. However, the president of the Banxico already warned the market that the easing cycle will come to an end very soon.

In Brazil, the COPOM decided to cut the Selic rate by 100bps to 9.25%. Policy makers said they will be more “parsimonious” in future rate cuts and keep in mind the potential impact of lower borrowing costs on inflation. We expect CB to deliver a 50bp cut in July to 8.75% and then pausing in the remaining of the year.

The latest monetary policy decision in Chile on June 16 was towards decreasing rates by 0.5% to a record of 0.75%. Indeed in the last six meetings, the Central Bank of Chile have decreased interest rates by 7.5%. Chile is however experiencing deflation that is a sustained decrease in the overall price level. This is a problem for Chile especially considering that the country is a commodity exporter and copper is low in the international markets.

A similar movement of decreasing rates was also observed in Colombia, where the Central Bank reduced interest rates by 0.5% to 4.5% on June 19. It seems that even Peru is also feeling the negative impacts of the crisis. Indeed, Peru’s central bank lowered its benchmark interest rate by 100bps to 4%, the fourth consecutive monthly reduction. Moreover, the monetary authority said it will keep easing monetary policy as long as inflation and domestic demand keep slowing and the global economy gets worse.

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