As developed market central bankers run out of monetary ammunition, some Latin American central bankers and EM analysts see plenty of space for easing policy within the region.
“In Latin America, and indeed most emerging markets there is space for real monetary stimulus, and emerging markets will continue to outperform developed markets,” Jan Dehn, head of global research at Ashmore, told GlobalMarkets. “Interest rates minus inflation in EM is just where it was 10 years ago, and inflation is at an all-time low, so for EM it’s as if QE had never happened.
“This is not the only reason I’m optimistic, but policymakers in EM absolutely have more room to cut.”
“Nearly every central bank in major emerging market economies lowered its policy rate in the third quarter,” said Tatiana Lysenko, lead economist for emerging markets at S&P Global, on Friday.
“Looser monetary policy by the Fed and ECB, generally favourable inflation dynamics, and weak growth suggest that we will see further cuts over the next months,” she said.
Julio Velarde, Peru’s central bank governor, told GlobalMarkets that further rate cuts would be “dependent on data”, though he noted that the market had been expecting a reduction to 2% this year, and the bank has so far only cut to 2.5%.
In August, Mexico began to cut rates for the first time in five years and some analysts expect 150bp of cuts by the end of next year.
Capital Economics is forecasting Latin American economies to grow just 0.7% overall in 2019, even when it excludes crisis-hit Venezuela. Yet the research firm expects the pace of GDP expansion to increase to 1.5% in 2020 and 2% in 2021, and said this week that the reason Colombia could “miss out” on the recovery is that it will not be entering an easing cycle.
But monetary policy alone will not push the region back to high growth rates.
Roberto Campos Neto, governor of Brazil’s central bank, told GlobalMarkets that the world was facing a “low growth global scenario with low inflation”. Yet though this “has an influence on the local scenario, it is not the main factor,”he said.
Brazil’s central bank is focussing on three factors: the global environment, local conditions and progress on the government’s reform agenda — with a comprehensive social security reform nearly fully approved.
It is these reforms have made investors extremely bullish on Brazil, and Dehn at Ashmore said that Brazil was “on the cusp of a major cyclical upswing”.
More emerging markets nations should follow this example if they really want to take advantage of the easing cycle.
“While easier financial conditions should support a pick-up in activity, this alone isn’t likely to meaningfully boost investment if confidence remains low,” said Lysenko.