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Latin America Ramps Up Caution on Rates Even as Fed Cues Easing

(National statistics institutes, )

(Bloomberg) -- Three Latin American central banks signaled unease over inflation to justify their cautious stance on interest rates Wednesday, contrasting with the Federal Reserve’s growing confidence that the start of its easing cycle is near.

Brazil held its benchmark Selic unchanged for the second straight month, flagging new risks to its consumer price outlook. Chile surprised most economists by pausing its yearlong easing cycle, reiterating the bulk of borrowing cost drops is done. While Colombia delivered a half-point cut, the split vote indicated push-back against prospects of faster reductions.

Meanwhile, the Federal Reserve held its rates steady, and Chair Jerome Powell said an interest-rate cut could come as soon as September in light of further progress toward the US central bank’s 2% inflation target.

The long-awaited start to rate cuts in the world’s largest economy should help Latin American central bankers by alleviating pressure on weakened currencies. Still, Wednesday’s decisions are the strongest sign yet that the Fed’s coming policy change alone won’t be enough to reinvigorate easing cycles in light of woes including resilient service costs and political tensions.

“The Fed set a relatively low bar for rate cuts; the expectation for September has been completely consolidated,” said Francisco Nobre, an economist at XP Investimentos. “In Latin America, central banks increased the amount of caution.”

Brazilian policymakers led by Roberto Campos Neto kept the benchmark Selic unchanged at 10.5% in a decision that was widely expected. Central bankers said there are inflation risks in both directions, but stated that a persistently weaker real, above-target cost-of-living forecasts and resilient services are creating upward threats to prices.

What Bloomberg Economics Says:

“Brazil’s central bank kept its policy rate unchanged on Wednesday but conveyed it’s more concerned about the inflation outlook. While the more hawkish tone wasn’t a clear signal policymakers are considering a hike, we expect markets to continue pricing in increases to the Selic rate before year-end.”

— Adriana Dupita, Brazil and Argentina economist

— Click here for full report 

Chilean central bankers voted unanimously to hold borrowing costs at 5.75%, as forecast by just four of 20 analysts in a Bloomberg survey. Board members wrote transitory factors were behind recent, smaller-than-expected increases in core inflation rates that exclude volatile items.

Policymakers estimate that the policy rate “will have accumulated during the first half of the year the bulk of cuts foreseen,” for 2024, they wrote in a statement.

Colombia cut borrowing costs by a half-point to 10.75% in a split decision after a jump in inflation weakened the case for faster monetary easing. Finance Minister Ricardo Bonilla, who holds a seat on the board, said consumer price increases will end this year near 5.5%, above the 3% target.

“The bar to accelerate in our view remains somewhat high given the pace at which year-over-year inflation is decelerating,” Bret Rosen, an economist and strategist for Latin America at EMSO Asset Management, said about Colombia.

The policy outlook for Brazil, Colombia and Chile could change in September if the Fed follows through with a rate cut, said Alberto Ramos, chief Latin America economist at Goldman Sachs Group, Inc.

“That would give the Latin American central banks extra degrees of freedom to calibrate monetary policy,” he said. “But ultimately whether this is the case will all boil down to the behavior of domestic currencies.”

Regardless, there will still be no shortage of domestic economic challenges. As of now, Latin America’s central banks won’t see consumer price increases back at target until 2026 at the earliest, according to Bloomberg surveys of economists.

Complicating matters further, there’s political pressure from presidents who are increasingly desperate to boost growth, and in some cases, lawmakers’ actions are directly fanning inflation.

“And there’s still uncertainty regarding the process of monetary flexibilization in the US,” said Nobre, from XP. “Markets are pricing in three cuts this year, but that could be optimistic.”

--With assistance from Giovanna Serafim.

(Re-casts story to include information from Chilean and Colombian central banks)

©2024 Bloomberg L.P.