Rate hikes are coming… in Latin America

September 17, 2015

Federal Reserve Board Chair Janet Yellen prepares to testify before a House Financial Services committee hearing on Capitol Hill at in Washington

Latin American central banks are watching today’s Federal Reserve meeting very closely. Some are ready to raise their own interest rates, even if Yellen does not pull the trigger now.

Central bankers from Mexico to Chile have come under great pressure this year as the Fed prepared to lift U.S. interest rates off record lows for the first time since 2008. Latin American currencies have weakened sharply against the U.S. dollar, raising concerns about inflationary pressures that have recently started to creep into the region’s already struggling economies.

The outlook seems clear if the Fed raises its benchmark rate this afternoon: the dollar strengthens further, capital outflows possibly gain traction – even if not at a disruptive pace – and Latin American central banks react.

But even if the Fed holds off for now, signaling instead that rates could rise in October or December, investors should be ready for action south of the border.

Peru has already moved, raising its benchmark rate by 25 basis points to 3.5 percent a week ago in a surprising decision.

Mexico and Colombia could come next, according to some economists, as local policymakers convene next week, on Sept 21 and Sept 25, respectively. While Reuters polls are underway to assess exactly how many analysts expect rates to rise, several have noted in recent days that central banks could opt not to wait for the Fed and stay “ahead of the curve”.

One of Mexico’s central bank’s five voting board members already voted for raising interest rates from 3 percent in July. Central bank governor Agustin Carstens acknowledged a preemptive hike as a possibility last month.

Chile may also feel emboldened to raise rates following Peru’s decision, as Reuters correspondent Mitra Taj reports.

The bar for further rate increases is higher in Brazil, where the economy is crashing into a deep recession and interest rates are already at a nine-year-high of 14.25 percent. But central bank president Alexandre Tombini did not rule that out as the Brazilian real continued to weaken near record lows. Some economists, still in a minority, say the Selic rate should fly even higher next year.

“In a context of additional fiscal deterioration, which is the most likely scenario for 2016, a more substantial increase in inflation would require a resumption of the monetary tightening cycle,” said Nilson Teixeira, chief Brazil economist at Credit Suisse wrote in a research report. He sees the Selic rate unchanged through 2016 for now only because the central bank will probably tolerate high inflation for longer, given the recession.

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