A Trio of Latin American Central Bank Rate Hikes

December 22, 2015

Monetary officials in Chile, Colombia and Mexico wasted little time last week matching the FOMC’s 25-basis point interest rate hike.

  • The Central Bank of Chile policy rate was lifted to 3.5%.  This was the second Chilean tightening of the cycle following one in mid-October.  Previously, 225 basis points of rate cuts were spaced out between January 2012 and October 2014, cutting the key rate to 3.0% from 4.25%.  Set against a 3% inflation rate target, a statement from bank officials observes that “annual CPI inflation declined to 3.9%, but is expected to again exceed 4% shortly. Core inflation —the CPIEFE— is still close to 5% y-o-y.”  Expected inflation remains anchored in line with the target, and officials intend to keep it there.  Chilean real GDP climbed 2.2% in the year to 3Q15.  As a big exporter of cheapening copper, the peso has lost about 13% of value in the past year.
  • Board Directors at the Central Bank of the Republic of Colombia raised their interest rate benchmark to 5.75% from 5.50%.  Such was the fourth hike since September, before which the rate level had been 4.50%.  Peso depreciation of more than 27% over the past year is feeding CPI inflation, which as of November was 6.4% and 5.4% on core items.  Expected inflation has risen above target, and economic growth last quarter in Colombia of 5.2% on quarter at an annualized rate and 3.2% from a year earlier exceeded the expectation of bank officials.
  • The Bank of Mexico’s leadership took preventive action against potential peso depreciation following the Fed’s 25-basis point tightening, matching that move with a hike of the Mexican policy interest rate to 3.25% from 3.0%.  Mexican inflation of 2.2% is below the target of 3.0%, but the peso has dropped 14% against the dollar during the past year, and officials worry that not matching the Fed’s move might subject the peso to undue additional depreciation and unhinge expected inflation from the target.  Unlike the circumstances in Chile and Colombia, last week’s Mexican central bank rate hike constituted a directional change.  From a pre-Great Recession high of 8.25%, Mexico’s central bank interest rate had been cut seven times by 375 basis points total between January 2009 and July 2009.  Four more cuts of 50 basis points in March 2013, 25 bps in September 2013, 25 bps in October 2013 and 50 basis points in October 2014 sliced the rate to a record low of 3.0% where such stayed for the next 14 months.

The currency situations in these cases, and the immediacy of the effect of a change in Fed policy on their own central bank policy stances illustrates the risks of U.S. monetary policy normalization.  If gradual and orderly adjustments by the Federal Reserve do not prevent disruption elsewhere, a darkening global economic and financial landscape is bound to wash back on the U.S. economy and constrain the FOMC’s ability to act.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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