Brazil was not the only country in the region to cut its base rate recently. Chile, Uruguay and Costa Rica have done the same, and others are likely to follow suit. Meanwhile, the European Central Bank and the Fed raised rates.
The reduction in the basic interest rate in Brazil, the Selic, announced at the beginning of the month by the Central Bank, is due to the drop in inflation expectations for this year in the country, but is part of a broader scenario of monetary easing in Latin America .
A week before the decision of the Monetary Policy Committee (Copom) that reduced the rate to 13.25% per annum, Chile also reduced its rate, to 10.25%. Other countries in the region, such as Uruguay and Costa Rica, also cut their rates, and Peru, Colombia and Mexico are expected to follow suit in the coming months.
Meanwhile, the European Central Bank (ECB) and the Central Bank of the United States, the Fed, raised their basic interest rates in July, and are considering new increases in the next meetings.
One of the reasons for this mismatch is that the last cycle of interest rate hikes in Latin America started earlier, in 2021, than in the United States and Europe, where this process started a year later. For this reason, the rise in interest rates has already resulted in controlling inflation, according to economists interviewed by DW.
This last cycle of high interest rates followed the rise in inflation caused by the disruption of supply chains in the pandemic and the impact of the war in Ukraine on the prices of energy and agricultural commodities.
Joan Domene, chief economist for Latin America at consultancy Oxford Economics, tells DW that Latin American countries have started raising rates earlier because their governments and societies have recent experience with uncontrolled inflation, so that central banks in the region generally are quicker to react.
“In addition, the transmission mechanisms [da taxa de juros para a inflação] are slower and shallower due to lower financial penetration and high informality, which requires more forceful action than in other countries”, he says.
He also mentions that efforts by governments in the region to adopt plans to seek balance in public accounts contributed to the reduction of inflation expectations, and helped central banks to reduce or consider reductions in their interest rates.
In Brazil, the most important sign in this regard was the approval of the new fiscal framework by the Senate at the end of June – as the senators made changes to the text that had passed through the Chamber, a final analysis by the deputies is still missing.
Currency effects and risks
The cycle of high interest rates benefited Latin American currencies, including the real, which in the first half of this year were among the most valued in the world against the dollar.
This occurs because higher interest rates attract foreign capital, which buy public debt securities in search of higher returns. To buy public debt securities in Brazil, for example, these investors need to exchange their dollars for reais, which causes this effect on the exchange rate.
On the other hand, when interest rates drop, public debt securities become less attractive to foreign capital, and the impact on the exchange rate goes in the opposite direction. After the recent cuts in their interest rates, the currencies of Brazil and Chile have depreciated against the dollar.
Ricardo Hammoud, professor of macroeconomics at Ibmec in São Paulo, says that the exchange rate trend will depend on the difference between interest rates in Latin American countries and the US interest rate. Currently, the Fed adopts a rate of 5.25% to 5.50%. Analysts and officials at the US authority have already suggested that further rate hikes are possible this year.
The rise in interest rates in the United States makes that country’s debt securities more interesting for investors, also reducing the attractiveness of bonds from Latin American countries – which have greater risk. “If the Fed raises the interest rate more and the risk of these countries increases, there is a probability that the currencies of these countries will devalue”, he says.
Ernesto Revilla, economist for Latin America at Citi bank, assesses that the markets, in general, have behaved in a stable manner, and that there has been ample communication from the Fed and other central banks about their actions.
On the possibility of inflation rising again, which would put pressure on interest rates, Revilla believes that this could happen if commodity prices advance again, as happened with oil in recent weeks, or if El Niño becomes stronger in 2024 and push food prices higher.
political pressure
Interest rates, which have surpassed double digits in countries such as Brazil, Colombia, Chile and Mexico, have been the target of criticism from politicians in recent months.
President Luiz Inacio Lula da Silva and his Colombian counterpart, Gustavo Petro, were among the leaders who publicly questioned their respective countries’ rates.
They did this because high interest rates tend to inhibit economic growth. In both Brazil and Colombia, central banks have autonomy in relation to the government – that is, presidents cannot interfere directly in setting rates.
For Hammoud, this type of public pressure made by presidents harms the performance of central banks, as it would provoke distrust in the markets, forcing the monetary authorities to keep the interest rate higher for a longer time. “The Central Bank is between a rock and a hard place, that is, if it keeps the interest rate high it is in confrontation with the government, and if it reduces it, it loses credibility. It is harmful to the economy”, he says. he.
Argentina is the main exception
In the world, among the countries that make up the G20, Argentina leads with the highest nominal interest rates, followed by Turkey, Brazil, Russia and Mexico.
With a reference interest rate that went from 97% to 118% this week and inflation above 100% a year, Argentina appears as the great exception of Latin America in the current scenario.
Santiago Manoukian, chief economist at the local consultancy Ecolatina, does not believe in cuts in Argentine interest rates this year, and assesses that, in the face of a scenario of uncertainty surrounding the local elections, new rate hikes may occur.
However, he says that, unlike in other economies, the increase in interest rates in Argentina does not produce so many recessive effects or that they punish consumption or the demand for investments. “The depth of the financial system in Argentina is very small”, says
Source: www.brasildefato.com.br
