Latin America

Argentina’s central bank on Thursday relaxed key monetary targets after overshooting annual goals for growth in monetary aggregates, heralding a stance that favours stoking growth over reining in inflation.

It is the first time the central bank has failed to meet the monetary programme since Argentina introduced the method in 2003, and points to a central bank increasingly at the service of a spendthrift government, which ejected the former central bank president earlier this year for refusing to hand over reserves to pay debt. Read more

Chile’s central bank has agreed on the third consecutive half point rise, taking its policy rate to 2 per cent.

Interest rate futures point to a year-end level of 3.75 per cent, but analysts are divided about the likely pace of increase. Read more

Growing concern amongst Asian central bank governors about capital inflows, which have seen a number of countries embrace once-dreaded capital controls, appears to be spreading to Latin America. Chile’s unflappable central bank governor, José De Gregorio, today expressed his concern about the growing number of foreign investors piling money into emerging markets. He says it is time to keep an eye on capital inflows.

According to El Mercurio newspaper, this is what he had to say at a seminar:

Capital flows are worrying me . . . This is not yet a problem in the Chilean economy, but we have to remain relatively alert and thinking about what implications this will have for monetary policy.

High copper prices, global stock market gains and the expectation that Chile’s central bank will continue to raise rates regularly have helped push the peso currency higher – it recently touched a five-month high. It has eased a little today against the dollar, trading around 513 to the greenback.

If De Gregorio is concerned, Bertrand Delgado, a senior analyst at Roubini Global Economics, says he has a few options to manage dollar liquidity. Read more

Economists surveyed by Chile’s central bank believe a 50 basis point rate rise is on the cards for Chile. The August policy rate will rise from 1.5 to 2 per cent, according to the median estimate of 37 economists. At year-end, the rate will be 3.5 per cent – a 50bp rise from last month’s survey – rising to 5.75 per cent by mid-July 2012. Historical rates are shown below:

Peru’s central bank has raised its benchmark rate a more-than-expected 50bp to 2.5 per cent, to counter rising inflationary pressures. The economy grew 9.2 per cent in the year to May and is forecast to rise a “spectacular” 10 per cent in the year to June, central bank chief Julio Velarde said a couple of weeks ago. Peru was the second South American country to begin raising rates, after Brazil. Since then, Chile has also increased rates.

Related posts on Latin America

Brazil’s central bank surprised many economists by raising interest rates by less than expected last week. Today, it published the minutes (in Portuguese only) of the monetary policy committee meeting at which the decision was taken. Anyone hoping they would make matters clearer may be disappointed.

As expected, the committee said weaker global and domestic demand had contributed to its decision. Less predictably, it suggested it would be happy to bring consumer price inflation in line with the government’s 4.5 per cent target only in early 2012, rather than during next year.

The minutes are clearly open to interpretation. In a note to clients, Itaú Unibanco said they confirmed its view that the committee, known as the Copom, would leave rates unchanged at its next meeting on August 31 and September 1. Barclays Capital, on the other hand, said they supported its call for a 50 basis point increase at the next meeting and a 25bp increase in October. Read more

With a short, sweet statement, the Bank of Brazil raised the key policy rate to 10.75 per cent late yesterday. A rise had been expected – some thought the rate would go to 11 per cent, in line with the two previous 75bp rises – to combat inflation. “Assessing the macroeconomic situation and prospects for inflation, the Committee decided unanimously to raise the Selic rate to 10.75% pa, without bias,” reads the statement (according to Google Translate).

This is the third consecutive rise since April 29, when the Selic target rate stood at 8.75 per cent; the rate was last increased on June 10.

It’s easy to get blasé about Brazil: the economy is thumping along; markets are relaxed about the forthcoming election; and nobody seems that excited – or even perturbed – by a further rise in interest rates on Wednesday.

So to wipe away any encroaching holiday stupor, consider this. Brazil probably has the highest real interest rates in the world, by a very fat margin (real interests being central bank rates minus inflation). And, by this evening after the central bank raises nominal rates by an expected 75 basis points to 11 per cent, they will be even higher still.

In the developed world, the historic real rate is about 3 per cent. But today, Japan excepted, real rates are all negative. They are about -1.5 per cent in the eurozone, and a chunky deflation-beating -2 per cent in the US and the UK. The emerging world should have a higher real cost of capital – because of risk, and perhaps lack of savings. Yet today, real rates are mostly negative in the emerging world as well. Read more

Chile, which has bounced back more strongly than expected from a devastating earthquake at the end of February, has hiked its key lending rate by 50 basis points, becoming the latest country in the region to start reining in monetary stimulus measures after recent rate rises by Peru and Brazil.

The half-point hike, to 1 per cent, was at the top end of market expectations, wrongfooting many who had expected the bank to take a more softly-softly approach.  The key lending rate had been at a record low of 0.5 per cent since July 2009 and the bank had not raised the rate since September 2008, when it was 8.25 per cent. Read more from Jude Webber on

After a couple of months of “will-they, won’t-they?” speculation, and, according to central bank minutes, increased discussion among bank board members themselves, Chile’s central bank is finally expected to begin raising interest rates when it meets on Tuesday.

Widespread expectations are for a 25 basis point rise, which would be the first increase since the bank jacked up its key monetary policy rate, or TPM, by 50 basis points in August 2008. The rate has been at a historic low of 0.5 percent since July 2009.

The bank has Read more

For the second time in a row, Brazil’s central bank has raised the Selic target rate by 75bp, as the economy expands rapidly and fears of inflation mount.

Historically, interest rates in the country are still low (see chart). Rates were last at 10.25 per cent in April of last year. The inflation target is currently 4.5 per cent +/- 2 per cent, and the data to May was rising, but within target, at 5.17 per cent. Read more

Amid great confusion, the suspended Venezuelan forex market will reopen today, under far greater control from the central bank. Quite how the trading band will be determined and defended is not known.

The unofficial “parallel” forex market was suspended on May 19, with authorities blaming speculators and enemies of Hugo Chavez for the depreciating bolivar and rising inflation. This has left importers struggling for a fortnight. As the FT’s Benedict Mander put it: “One is left wondering why they couldn’t have decided how the new system was going to work before casting out the old.”

The market is expected to work as follows: Read more

By Jude Webber

Argentina’s government has unveiled stricter controls on dollar purchases in what it says is a crackdown on money laundering and tax evasion. Though people will still be able to buy $2m a month without justifying their purchases, the idea is to eliminate cash transactions and use tax data to scrutinise operations.

Here’s what economist Miguel Kiguel had to say before the measure – which was leaked in the press over the weekend – was formally announced:

In line with … higher demand and with the fear of losing reserves, it has emerged in the local media that the Central Bank is going to announce new regulatory measures for the currency market. We do not believe that these stricter controls will be effective to reduce capital flight but they could be taken as a sign that the government is willing to increase controls to avoid losing reserves. However, it is difficult for these stricter controls to prevent capital flight and it is more likely that they will end up an incentive for the informal market, increasing the spread between the informal and official dollar.

 Read more

By Jude Webber

Official data showing that the Chilean economy grew at its fastest monthly rate in a decade must be music to the ears of Sebastián Piñera, the new president. His election pledge to boost annual growth to 6 per cent always sounded ambitious, and looked especially so after the country’s devastating earthquake at the end of February.

But what the April data revealed was a speedier-than-expected business rebound. Bloomberg puts this in context:

The economy expanded 8.2 percent in April from March, the biggest increase since 1996, and 4.6 percent from a year earlier, the central bank said today on its website. It was the quickest annual growth since September 2008 and double the median forecast of 10 economists surveyed by Bloomberg.

April’s expansion comes after the economy shrank the most since 1996 in March following an 8.8-magnitude earthquake on Feb. 27 that caused almost $30 billion in damage. The faster- than-forecast expansion added to speculation that the central bank will raise its benchmark interest rate June 15 for the first time since September 2008.

The data raise two questions. Read more

Venezuela's bolivar fuerte notesBy Benedict Mander

They said it would take Venezuela two weeks to come up with the new currency trading rules for its multi-tiered exchange rate. Instead it took three – not bad for Hugo Chávez’s Bolivarian revolution, whose track record on following through with announcements on time is shaky.

But, then again, the new rules are incomplete.

Most important, they don’t explain how the central bank will determine the value of the bolívar against the dollar in its “free market”, alongside Venezuela’s two other fixed exchange rates.

Nor is it clear when trading itself on the Bloomberg E-bond platform will actually begin. Monday is a bank holiday in Venezuela. Read more

By Jonathan Wheatley

More on the debate about whether Brazil is overheating: Henrique Meirelles, central bank governor, weighed in today on the “No, it’s not” side with an assurance that inflation was under control, delivered on the sidelines of a meeting of G20 finance ministers and central bankers in Busan, South Korea.

He would say that, of course. The central bank has fielded a lot of criticism from market economists in recent months accusing it of being behind the curve in the fight against inflation. The bank raised its policy interest rate on April 28, its first rise since the last easing cycle, which lasted from January to July last year.

Critics say even the bigger-than-usual three quarter point increase was too little and too late to deal with Brazil’s ever faster pace of growth. Read more

By Jude Webber in Buenos Aires

The gospel according to Argentina goes something like this: thou shalt not default.

According to former central bank chief Martín Redrado, Argentina may be in no position to dish out recommendations to the likes of Greece, but if there is one thing it learned in its 2001 crash – the biggest sovereign default in history on nearly $100bn – it is this: default is not an option.

Argentina knows first-hand the pain involved in bailing on creditors and a disorderly exit to a fixed currency regime. The cost was economic and social chaos and it is still paying the price.

Speaking to Bloomberg Television in London, Mr Redrado said markets remained sceptical about relying on fiscal adjustment and so Greece should reschedule debt in a market-friendly way. He also noted how Latin America had moved from fixed to flexible currency regimes and was now a “beacon of stability and growth” in emerging markets. He said: Read more

By Adam Thomson in Mexico City

Are remittance flows to Mexico finally recovering? To judge by figures released by the country’s central bank on Tuesday, the answer may be a tentative “yes”.

The amount of money sent back home in April by Mexicans living abroad was $1.78bn, the first year-on-year increase in the last 17 months, and above private-sector forecasts.

That can only be good news for the millions of families that have come to rely on these financial flows to fund everything from putting food on the table each day to paying for school supplies, medical bills and even the construction of homes.

But whether the monthly increase truly represents a turn-around is still unclear. It is true that improving macroeconomic data from the US, particularly in employment and manufacturing, suggests that there is a solid foundation for optimism.

As a research note published on Tuesday morning by Economía Ixe, part of Ixe bank, states: “The recovery in the north American labour market is starting to turn into a greater disposable income for Mexican migrants.”

But don’t get too excited just yet. Read more

By Jude Webber

As the song goes dime cuándo, cuándo, cuándo… (tell me when, when, when…).

The minutes of Chile’s May central bank meeting, when the key lending rate was kept on hold at 0.5 per cent, revealed that discussions intensified behind closed doors about when to start increases. No surprises there – there has been intensifying discussion about that for a while.

So the real question is perhaps not, ‘will rates rise at the next meeting, on June 15′, but ‘how much will they rise?’

Alberto Ramos at Goldman Sachs reckons on a 25 basis point rise. As he says:

The message in the minutes should be somewhat discounted as it reflects the data available up to that meeting … Since then the leading indicators of activity were significantly stronger than expected and today’s labor market report was also much better than expected. Assuming the global market sentiment does not deteriorate from here with the European fiscal situation the rate normalisation cycle should begin in June.

Chilean inflation data, he says, could provide the pointer – a worse than expected result could lead the bank to hike by a half point. Consumer prices rose 0.5 per cent in April, pushing annual inflation to the fastest pace since June 2009.

The minutes revealed it was unlikely to keep the rate unchanged for many more months and

…in that sense, the flows of information will allow us better to calibrate the size of the rate rise required to keep to the goal, but that does not imply that waiting will afford relatively more information about the optimum time to begin normalisation.

Roubini’s Bertrand Delgado reckons the central bank will start tightening in June or July with a 25 point hike and: Read more

By Jonathan Wheatley in São Paulo

Brazil’s central bank raised its core interest rate by three-quarters of a percentage point on Wednesday evening, confirming market expectations that it would act aggressively to deal with rising inflation and the threat of an overheating economyRead more