Foreign Policy Blogs

Peppers on Ice: LatAm Central Banks Adjust to US Slowdown

Peppers on Ice: LatAm Central Banks Adjust to US Slowdown Scarcely a month ago, market analysts were calling for Latin America’s central banks to hike interest rates. But on the heels of weak US quarterly GDP numbers and signs that the EU debt crisis may envelop Spain and Italy, market analysts are now forecasting lending rate cuts for Latin America’s two largest economies.

The yield on Mexican futures contracts sank 13 basis points to 4.72% last week, suggesting traders think central bank Governor Agustin Carstens will cut the country’s benchmark lending rate, already at a record low 4.5%. Unlike the region’s other major economies, Mexico hasn’t changed its rate in the past year.

In its most recent statement on August 10, Mexico’s central bank lowered the estimate for 2011 GDP growth from 5.0% to 4.8%. Projections for 2012 growth also got whittled, from 4.8% to 4.5%.
Given current pitfalls in the global economy, this is a stout outlook. The looming threat for Mexico is that the United States, which draws in 80 percent of Mexican exports, will putter along at two percent growth for the next several years.

Speculation is also growing that Brazil will need to cut its main lending rate—currently 12.5%—before the year’s end. Should it come to pass, it would mark one sharp volte-face; barely a month ago Goldman Sachs forecast that the lending rate would steadily increase to 13.5% by late 2011.

After heady 7.5% GDP growth in 2010, Brazil’s economy is now expanding at the same clip as Mexico’s. This isn’t necessarily a bad thing, but adjusting to a global economy that’s stuck in first gear may create problems. Inflation in Brazil is the highest of any major economy; lowering the benchmark rate could add to inflationary pressures. A flabby budget is another problem. And any slowdown in demand for Brazil’s commodities could spell serious trouble.

Brazil’s technocrats will have to thread the monetary needle.

 

Author

Sean Goforth

Sean H. Goforth is a graduate of the University of North Carolina-Chapel Hill and the School of Foreign Service at Georgetown University. His research focuses on Latin American political economy and international trade. Sean is the author of Axis of Unity: Venezuela, Iran & the Threat to America.