Easing cycles still have a bit further to run

Monetary policy easing cycles across Latin America are getting close to an end, but the evidence of the past month suggests that central banks think they still have a bit more work to do. Policymakers in Colombia and Peru surprised the markets this month by cutting interest rates, and the prospect of further falls in inflation points to additional easing in the months ahead. And while Chile’s central bank board left rates unchanged this month, it used the accompanying statement to hint that further cuts are likely in the near term. In Brazil, a 50bp cut in the Selic interest rate next month has been priced into markets for some time, and the recent rise in inflation is unlikely to alter COPOM’s plans to trim rates a bit further. The exception in all of this is Mexico. A recent surprise rise in inflation has led to speculation that the central bank will restart its tightening cycle. Our view is that the bar for rate hikes is now quite high given that inflation is likely to fall sharply from January. Instead, the central bank will rely on FX swaps as a first line of defence in the event of sell-offs in the peso.