Emerging Markets in Latin America to Make Historic Interest Rate Cuts

Latin American emerging markets are making history by cutting interest rates after hiking cycles ahead of developed countries. Chile starts with a 75 basis point cut, followed by Brazil, Colombia, Peru, and Mexico.

Emerging Markets in Latin America to Make Historic Interest Rate Cuts
Witness history in the making as emerging markets cut rates after hiking cycles.

Hold on to your sombreros, folks! It's time for some financial fiesta in Latin America! This week, we're witnessing a monumental shift as the central banks of emerging markets in the region gear up to take the daring step of cutting their interest rates. And you might be wondering, "Why all the excitement?" Well, it's because these savvy countries decided to dance to their tune by hiking rates before the developed countries did. Now they're ready to samba their way to lower rates, and that's not something you see every day!

First up on the chopping block is the Central Bank of Chile. Picture this: their benchmark rate, standing tall at 11.25 percent, is about to undergo a daring 75 basis point cut. Olé! Brazil's central bank is also in on the action. They plan to slice through their current 13.75 percent rate in August, as estimated by the financial wizards at Barclays. Not to be left out of the party, Colombia's central bank is poised to make its first-ever rate cut next month, with a benchmark rate of 13.25 percent.

Wait, we're not done yet! The Central Reserve Bank of Peru is getting its scissors ready to snip its rate of 7.75 percent in October. And it seems Mexico's Bank of Mexico (Banxico) wants to join the fun too. They'll be busting a move by cutting rates either by the end of this year or early next year. Talk about a synchronized interest rate dance-off!

But hold your cervezas, because there's a bit of a twist in the tale. The analysts at Citibanamex Expectations Survey predict that Banxico will play the coy card and make its rate cut in December by a modest 25 basis points, taking it down from 11.25 to 11 percent. However, the Barclays crew disagrees, expecting the rate cut to hit the stage a few months later in February 2024.

Now, you might be scratching your head and wondering why the emerging markets are feeling so giddy about this whole rate-cutting extravaganza. Ah, well, our friends at Oxford Economics have the answer! They tell us that these early birds of the financial world are being proactive and aggressive, which gives them the upper hand to cut rates before their developed counterparts. And that, my friends, is turning the tables on the historical trend when emerging markets used to wait around for the big guys to make their moves.

You see, Brazil was the first to take the lead in March 2021, raising its benchmark rate, followed gracefully by Mexico in June of the same year. Now, the big question on everyone's lips was whether the emerging markets could act swiftly enough to lower rates while developed markets were gearing up for rate hikes. But never underestimate the resilience and determination of the Latin American markets!

Gabriel Casillas, the chief economist for Latin America at Barclays, was positively buzzing about this exciting development. He declared, "There is going to be a milestone. The Central Bank of Chile is going to start a rate cycle, it's going to be the first major emerging market to lower rates." Bravo!

But what about the effect of these interest rate salsa moves on inflation, you may ask. Fear not! João Ferraz, a wise economist at Coface in Brazil, assures us that inflation will groove its way down to the target set by the region's central banks. And with both rate cuts in the emerging markets and rate hikes in the US, the interest rate spread between them will narrow, causing some emerging currencies to shimmy and shake during the latter part of the year.

Notably, the Mexican peso is expected to retain some of its swagger until the year's end. Why, you ask? Because the spread in Mexico is wider, and it's supported by robust macroeconomic fundamentals and a high carry trade despite the impending rate cuts. Way to hold your ground, Mexico!

So there you have it, amigos and amigas! The emerging markets in Latin America are throwing an interest rate bash like never before. With their spirited approach to rate cuts, they're shaking up the financial world and turning old trends on their head. So grab your maracas and join the fiesta, because it's going to be one for the history books!