Latin American central bank policy rates unlikely to return to pre-pandemic levels in the medium term
| This analysis was produced by S&P Global Market Intelligence, not S&P Global Ratings, which is a separately managed division of S&P Global. Please attribute any commentary/data you cite from this analysis to S&P Global Market Intelligence. Summary: S&P Global Market Intelligence does not anticipate Latin American Central Bank policy rates will move into stimulative territory over the short term, as inflation expectations will remain high and policy rates in developed economies will also be higher than pre-pandemic. |
Central banks in Latin America’s major 5 economies – the LatAm 5 Countries of Brazil, Mexico, Peru, Colombia and Chile – responded more quickly and forcefully, relative to developed economies, to the surge in consumer price inflation rates in 2021–22. Given that inflation has come down sharply in the region, monetary authorities have begun their respective monetary easing cycles, but major inflation rate reductions will be necessary to allow central banks to move to a neutral stance.  Major countries in the region have made substantial progress in curtailing inflation, but targeted levels have not been achieved In Mexico and Colombia, the annual headline inflation rates are well above the targeted bands, while in Chile, the rate is right on the upper bound of its targeted band. In Brazil and Peru, inflation is relatively under control but not at target. The major supply shocks that drove inflation in the last two years – high oil prices, supply chain disruptions and high international food prices – have vanished. This has helped the disinflation process but was not enough to bring the desired price stability. S&P Global Market Intelligence expects inflation to decline in 2025 in the LatAm 5 countries, as pent-up demand, or postponed demand, for services fades away. Monetary authorities in the LatAm 5 are moving toward a less restrictive monetary stance Brazil and Chile have taken sizable steps in moving away from very restrictive monetary policies and toward neutrality; they have already executed cumulative rate cuts of 325 basis points and 475 basis points, respectively. S&P Global Market Intelligence estimates that if inflation expectations were well anchored, Brazil’s central bank could slash the rate by another 300 basis points, while Chile’s central bank could cut the rate by another 200 basis points. In the remainder of 2024, Brazil’s central bank will take a more cautious approach. It is expected to execute a few 25-basis-point cuts and will pause at some meetings based on inflation developments and inflation expectations. This will take the policy rate to the 9.50%-10.00% range by year-end. It will be similar in Mexico, however, Banxico will have additional constraints based on US Federal Reserve actions, as the Mexican central bank pays close attention as not to reduce significantly the spread between US and Mexican interest rates to avoid capital outflows. In our view, Mexico and Colombia have more space to reduce interest rates, but this may have to wait until inflation is more controlled. Peru also has space to further reduce the policy rate to reach its neutrality, but the central bank will wait until the inflation balance of risks gets more balance.  For most countries in the LatAm 5, we do not anticipate that policy rates will return to pre-pandemic levels over the medium term Policy rates could fall below estimated neutral levels if inflation rates drop below target for a sustained period. But inflation undershoots are likely to be less common than in the pre-pandemic years due to structural changes: reduced labor supply, reshoring, trade tensions and expansionary fiscal policies. Another important reason central banks in the region will not reduce policy rates to historical low levels is that in the developed economies, and mainly in the US, central banks will not go back either to the almost zero policy rates prevailing at the end of the previous decade. So, to keep relatively attractive interest rates and to avoid capital outflows and the depreciation of local currencies, central banks in Latin America will have to maintain the relative spread.  |
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