Latin America's major central banks, which have led some of the most aggressive tightening over the last two years, may now be poised to lead the world on interest rate cutting amid clear signs of slowing inflation in places like Chile and Brazil.
The potential key inflection point comes even as the U.S. Federal Reserve and the European Central Bank both signal further interest rate hikes may be on the horizon, and the Bank of England surprised many investors by hiking interest rates half a percentage point last week.
Latin America embarked in early 2021 on one of the world's sharpest monetary tightening cycles to contain runaway inflation fueled by bottlenecks in the global production chain, rising food prices, and the spillover effects of fiscal stimulus measures used to ease the economic pain of the COVID-19 pandemic.
That's meant rates are already sky-high - 11.25% in Chile and Mexico, and13.75% in Brazil - with more room to cut.
"We expect Latin American central banks to be the first to cut rates globally because there are various domestic dynamics that have benefited the region," said Joan Domene, senior economist at Oxford Economics, citing better-than-expected economic activity and slowing inflation.
Goldman Sachs analyst Alberto Ramos wrote in a June note that the region was seeing "gradual but steady and broadening" progress on inflation, including core prices, that could signal a "policy pivot ahead," albeit with caution.
"Central banks will be looking for signs of disinflation consolidation and macro rebalancing before starting to credibly reduce the level of monetary policy restrictiveness," he said.
The small South American country of Uruguay has already cut rates, by 25 basis points in April. Chile is seen easing as soon as next month, with Brazil potentially following close behind.
Chile's central bank kept its key interest rate on hold at 11.25% last week, but said if recent positive trends continue, it could begin cutting the rate in the short term.
Forecasts are pointing to a rate cut next month, said Cesar Guzman, macroeconomic analyst at Santiago-based Grupo Securities.
"The market has already priced in the expectation of a 100-basis-point cut," he said.
In regional powerhouse Brazil, the central bank held rates steady last Wednesday for a seventh straight time, though it took a more dovish tone on future steps by excluding the possibility of upcoming rate hikes from its policy statement.
Brazilian financial markets showed many traders are betting the bank will kick off a cycle of monetary easing in August, as President Luiz Inacio Lula da Silva again called on the monetary authority to cut rates to spur growth.
MEXICO AND COLOMBIA STILL WAITING
Mexico looks further behind. Its central bank kept the rate steady last week for a second straight meeting, signaling it will hold the rate "for an extended period" despite consumer price inflation at its lowest in more than two years.
"This, alongside hawkish noises from the Fed mean that Banxico is unlikely to shift towards rate cuts until the turn of the year," said Kimberley Sperrfechter, Latin America economist at Capital Economics.
Peru's central bank, however, which has kept its benchmark interest rate at 7.75% for five consecutive meetings, is seen likely cutting rates in August, according to analysts.
The region's distant outlier is Argentina, which only last month hiked its benchmark interest rate by 600 basis points to an astonishing 97% as the South American country battles inflation running at 114% on an annual basis. Even there, however, the central bank opted to hold rates steady in June as monthly inflation slowed for the first time in half a year.
In Colombia, the central bank's board is expected to hold the interest rate steady at 13.25% at its next meeting this week on the back of a better inflation outlook, ending nearly two years of rate rises aimed at containing rising consumer prices.
"Everyone is expecting that the previous rate hike was the last one, and it was a split decision," said Andres Pardo, at XP Investments. "Colombia and Mexico will be the last ones to cut rates, possibly in the fourth quarter."
