In order to face the impacts of the new coronavirus on the activity level, Latin American countries are implementing an aggressive monetary policy and following, for the first time, the path of negative real interest rates. This is shown by reports from institutions such as Bradesco and Infinity Asset Management.
Chile and Peru have already taken their rates, respectively, to 0.5% and 0.25% (the lowest nominal level among emerging countries) per year. Bradesco, as reported by Valor Econômico, is betting that inflation in both economies will reach 2.5% and 2.8% by the end of 2020, which would lead both countries to experience negative interest rates.
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The same would happen in Colombia. Currently, the country’s benchmark interest rate is 3.25%, but Bradesco estimates that it may reach 2.75% at the end of 2020. As consumer inflation is projected at 2.8%, the real rate interest rates would be negative in the country.
According to the Bradesco report, Mexico would come close, but would not reach negative interest rates. For now, Bradesco’s bet is that, by the end of 2020, Banxico will reduce the country’s benchmark rate from 6% per year to 3.5% per year, and that inflation this year will reach 2.9%. According to a ranking by Infinity’s chief economist, Jason Vieira, with the top 40 economies in the world, Mexico would end the year with a real interest rate of 1.71%.
Brazil, the region’s largest economy, would also still be somewhat distant from negative real interest rates. Last week, the Central Bank’s Monetary Policy Committee (Copom) took the country’s benchmark interest rate to a new historic level, at 3% per year. In the Minutes of last week’s meeting and disclosed today, Copom said that it does not rule out a further cut in the basic interest rate, “no higher than the previous one”, by -0.75 percentage points. Considering this, for Bradesco, the country may close 2020 with a benchmark interest rate of 2.25% per year, and inflation at 2.2%.
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In Infinity’s projections, made on May 6th, before the release of the latest Copom minutes, Brazil still appears among those with the highest real interest rates in the world: 0.38% per year, well above the average rate of -0,54% per year projected for the next 12 months for the set of analyzed countries.
In the document, Copom admits that the demand deflationary shock will lead to a inflation slowdown, to “levels not compatible with the targets” foreseen at the beginning of the year. The Council also makes it clear that there is a discussion among its members about a cap, a minimum operating interest rate that the country could not pass.