Collapse of Latin American COINS narrows margin for rate cuts

The collapse in Latin American currencies slows the ability of policy makers to provide a monetary stimulus to economies that were bad even before the outbreak of the new coronavirus.

Brazil’s real, which is the world’s worst performing currency this year, extended its settlement and fell to new lows after oil prices fell more than 20% on Monday.

The Colombian peso was the currency that presented the biggest drop in the world, followed by the Mexican peso, which suffered its biggest decline since the election of US President Donald Trump in 2016.

“A brave central bank is needed to reduce interest rates in the face of such a severe sale of currencies,” said Neil Shearing, chief economist at Capital Economics.

“Central banks in Latin America had been preparing for another round of rate cuts, but developments in the last 24 hours change that. I think the majority will now stand by,” he added.

In Brazil, operators reduced bets on more interest rate cuts in the coming months after the head of the central bank, Bruno Serra, said the current situation called for “caution” in the direction of monetary policy.

Just last week, the bank said weaker growth was a bigger concern than faster inflation, reopening the door to more interest rate cuts as the coronavirus epidemic affects exports and domestic demand. Operators now forecast only an additional cut of a quarter of a percentage point this year.

In turn, in Mexico, operators also reduced bets on rate cuts on Monday after the massive sale of the peso and a rebound in the inflation rate in February. Analysts from Crédit Suisse to Banco Base say that Banxico is likely to intervene soon to defend its currency.

Brazil, Mexico and Chile were among the slowest growing economies in the world last year and are vulnerable to a global recession that affects the demand for their raw material exports. Stocks plummeted on Monday when an oil price war shook markets that were already under maximum pressure due to the expansion of the coronavirus.

The central bank of Brazil intervened in the spot currency market on Monday for the first time this year, selling almost US $ 3.5 billion of its foreign reserves to try to curb the fall of the real. The same currency weakened 2.5% reaching a historical low of 4.74 per dollar.

Peru’s central bank increased sales of currency swaps to soften the sun’s fall, which is trading at a minimum of four years. The bank’s board will set its key credit interest rate on March 12 and, until last week, seven out of nine economists forecast a 2.25% pause, while two forecast a 2% cut.

The Bank of the Republic of Colombia and the Ministry of Finance published a joint statement, saying that the peso is responding to changing global conditions and that they will take appropriate measures in a coordinated manner.

The Chilean peso fell less than most of its Latin American peers due to the optimism that its economy is in a stronger position to resist the global slowdown. The Government has already promised billions of dollars in additional expenses after a wave of protests last year, while the prices of its main export, copper, have remained better than those of oil and other commodities.

The oil importing nations in Central America and the Caribbean will benefit from lower oil prices, although this will not be enough to compensate for the damage caused by the coronavirus in tourism and manufacturing supply chains that is “real, huge and happening right now, “commented Shearing

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