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Brazil, Colombia and Chile Will Deepen Interest Rate Cuts as Inflation Slows
(Bloomberg) -- Brazil will likely stick to its pace of interest rate cuts while Colombia and Chile could speed up theirs, propelling Latin America’s shift toward looser monetary policy as inflation slows.
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Brazil will reduce the benchmark Selic by a half-point for the fifth straight meeting late on Wednesday, to 11.25%, according to all analyst estimates in a Bloomberg survey as well as policymakers’ most recent forward guidance. The exact size of cuts in the other two nations, however, is less certain.
Sixteen of 20 analysts expect Chile to lower borrowing costs by a full percentage point, to 7.25%. Three see a second straight reduction of 75 basis points while one expects a much more aggressive, 125 basis-point drop.
In Colombia, economists are split: 16 pencil in a half-point cut, to 12.50%, while 10 see policymakers lowering rates by a quarter-point for the second straight meeting. One expects an even larger reduction of 75 basis points.
Central bankers are reaping the rewards of an early post-pandemic tightening cycle that has helped to bring inflation closer to targets. While high real rates continue to keep a lid on demand, droughts and floods from the El Nino weather pattern and global geopolitical conflicts risk driving commodity costs higher, causing additional supply shocks. Of the three countries, analysts only see near-term price hikes on target in Chile, though Brazil’s remain within its tolerance range.
What Bloomberg Economics Says
“Interest rates remain high and consistent with tight monetary conditions. That along with decelerating inflation, lower inflation expectations, and increasing economic slack support additional accommodation. Improving external financial conditions, due to increasing expectations for the Federal Reserve and the ECB to start cutting interest rates this year and lower reserve requirements in China, provide additional flexibility for central banks in Latin America to cut.”
— Felipe Hernandez, Latin America economist
The trio of Latin American rate decisions will come the same day the US Federal Reserve will likely keep a target range of 5.25%-5.50% to the federal funds rate, laying out when and how to communicate about future borrowing cost cuts.
Brazil’s Fifth Reduction
Current rate: 11.75%
Time of decision: after 4:30 p.m. ET
With annual inflation back within the tolerance range for the first time since 2020, most analysts see policymakers led by Roberto Campos Neto keeping their guidance for additional half-point cuts at their next “meetings.”
Despite recent progress, inflation expectations remain above the 3% target for the foreseeable future, and a closer look at recent price reports reveals some worrying trends, ruling out chances of even faster easing. Specifically, central bankers could comment on soaring food costs driven by El Nino as well as wage pressures.
Read more: Lula Gets New Nemesis in Inflation Fight as El Nino Brings Rain
“Despite a benign scenario on inflation, this won’t be an uninteresting meeting,” said Andre Nunes de Nunes, chief economist at cooperative finance institution Sicredi. Food prices could soon slow after a few “alarming” readings but services costs are jumping. “That’s drawing attention, since it’s a component of inflation that carries a lot of inertia,” he said.
Slower growth might could also be a topic of debate for central bankers as President Luiz Inacio Lula da Silva’s government comes under pressure to boost activity with greater spending.
Wednesday’s meeting will be the first for Lula’s latest director nominees, Paulo Picchetti and Rodrigo Teixeira. Though analysts expect a unanimous decision, divergences could appear in next week’s meeting minutes, as four out of nine board members have now been named by the leftist president.
Chile’s Jumbo Cut
Current rate: 8.25%
Time of decision: at 4:00 p.m. ET
Chile is poised to accelerate its rate cut pace for the second meeting after consumer prices posted the biggest monthly drop in over a decade. While the latest central bank projections show headline inflation hitting the 3% target later in 2024, private sector analysts estimate that will happen in the first half of the year.
Read more: Chile Consumer Prices Post Biggest Monthly Drop Since 2013
They are betting the central bank will change its forward guidance, clearing the way for more aggressive easing than initially expected.
Deutsche Bank analysts including Chief Latin America Economist Francisco Campos said Chilean policymakers may cut rates by a full percentage point in each of the next three meetings. “We flag a balance of risks skewed to a deeper easing cycle in case the external environment remains supportive and the economy continues to show slack,” they wrote in a note.
The fact that Chile’s subsequent monetary policy decision won’t take place until April gives the central bank additional incentive to deliver a bigger cut now.
Wednesday’s decision will also be the first with a new board member, former Banco Santander Economist Claudio Soto.
Colombia’s Close Decision
Current rate: 13%
Time of decision: after 1:00 p.m. ET
Colombia joined the group of Latin American countries relaxing monetary policy last month with an initial cut of 25 basis points. While analysts and traders expect borrowing costs to fall throughout the year, there’s no consensus about the pace.
Economists at institutions including Goldman Sachs expect the seven-member board will keep the easing pace as they consider the inflation slowdown to be gradual and see consumer price risks from El Nino.
Colombia has seen record-high temperatures and wildfires throughout the country, and authorities expect a drought to continue through the end of February. Annual inflation slowed to 9.28% in December — the first single-digit reading in a year and a half — though it’s still well above the 3% target.
Read more: Colombia Inflation Surprise May Put Faster Rate Cuts in Play
On the other hand, arguments in favor of a bigger, half-point reduction center on falling inflation expectations, which now stand at 5.17% in 12 months, according to a recent central bank survey.
“The real interest rate is at a very restrictive level,” said Sergio Olarte, an economist at Scotiabank Colpatria. “The central bank needs to move relatively fast if it wants to contribute to the economic growth recovery.”
--With assistance from Rafael Gayol and Giovanna Serafim.
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