Currency sell-off puts paid to further policy loosening

Currencies in Latin America have regained some ground over the past week, but have still typically fallen by between 10-20% against the dollar over the past six months. The risk that the slide in currencies triggers a spate of crises across the region is much lower than in the past: balance sheets are stronger and dollar debt burdens are more manageable. Some companies that have borrowed heavily in dollars could run into problems, but the fallout should be contained. Instead, the bigger concern for policymakers is that the currency sell-off will add to inflation pressures. Note that inflation is already running above its target in Brazil, Chile, Colombia and Peru. As it happens, we don’t expect a further jump in inflation over the coming months – indeed, we think it will edge down in much of the region. But the currency sell-off has put paid to further policy loosening in several countries. We had expected that slower growth could trigger interest rate cuts in Peru and Mexico, but this now seems unlikely. Instead, we now expect rates to remain on hold until the end of the year. Elsewhere, policy easing is still possible in Colombia, but the chances are no better than 50/50 and any cuts will be small. Finally, in Brazil, interest rates have further to rise.