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Emerging Markets

Latin rates set for year-long easing

The cycle of monetary policy loosening that has gained pace in Latin America is likely to go on until the end of the year.

The cycle of monetary policy loosening that has gained pace in Latin America is likely to go on until the end of the year.

Although policy-makers are keeping their cards close to their chests, there is a consensus among analysts that the loosening will continue.

That may help stem the impact of the global economic crisis in a region where fiscal constraints limit the margin for governments to engage in US- or European-style anti-cyclical fiscal policies.

Guillermo Mondino, head of Latin America research at Barclays Capital in New York, said he had greater belief in central banks than in fiscal policy. Monetary policy “allows for a more aggressive easing than the potential for countercyclical fiscal policy”.

Julio Velarde, president of the Peruvian central bank, said central banks “are more aggressive and stronger” than they used to be.

Latin central banks have lagged behind their counterparts around the world in easing monetary policy, due to concern over the pass-through of rising commodity prices last year to inflation.

Even countries like Brazil that pursued a distinct restrictive monetary policy in recent years have recently promoted a series of aggressive cuts in the benchmark Selic rate.

Maria Celina Arraes, deputy governor of the Brazilian central bank, declined to comment on policy details, but said: “We cut down, because our inflation models and market expectations pointed to a decrease.”

Earlier, Henrique Meirelles, the governor of the bank, told reporters [in Brazil] that it was the first time in more than a decade that the central bank is in a position to promote an interest rate cut in the midst of an international financial crisis.

“In 1997, interest rates were raised to 43%,” he told the American chamber of commerce in Sao Paulo recently. “In 2003, real interest rates were at 17%, now they are at 5.2%.”

Brazil cut its base rate twice this year, by a total of 250 basis points (bps), to 11.25%.

Mondino pointed out: “Central banks have started promoting cuts. We have very aggressive cuts now in most countries, very aggressive in Chile, Brazil and Colombia. Banxico in Mexico is starting to catch up after a slow start.”

Mexico has cut its base rate by 150 bps since the beginning of the year. Chile was most aggressive, and slashed its base rates by 600 bps.

The Institute of International Finance said in a report: “The trend is expected to be extended during the coming months. We believe that by the fourth quarter of 2009, interest rates in a number of countries are likely to be well below a neutral level, and to remain so well into 2010.”

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