Mexico, Brazil Inflation Slows, Paving Way for Rate Reductions
Slowing inflation in Mexico and Brazil, Latin America’s two biggest economies, is paving the way for central bankers to cut interest rates and curb gains in their currencies, analysts such as UBS AG’s Michael Gavin said.
Government reports scheduled for release today will show Mexico’s annual inflation rate dropped to a record low in September while Brazil’s rate held near its lowest in 16 months, according to more than a dozen economists surveyed by Bloomberg.
Declining inflation rates may prompt Mexico to reduce its benchmark lending rate for a third straight month and Brazil for a second month, said Gavin, chief Latin American economist at UBS in Stamford, Connecticut. That’s a contrast to the U.S., where the Federal Reserve continues to raise its overnight rate.
“As the interest-rate differentials narrow, there will be some impact on the currencies,'’ Gavin said. “Somewhat weaker currencies would probably be welcomed by policy makers in Mexico and Brazil.'’
Brazil’s real has gained 39 percent and Mexico’s peso has advanced 5.8 percent since May 2004, making products from the two countries more expensive in dollar-terms in export markets.
The currency rallies have been sparked in part by the interest-rate differential between the U.S. and the Latin American countries. Mexico’s 9.25 percent benchmark rate and Brazil’s 19.50 percent benchmark rate are more than double the Fed’s 3.75 percent, luring money out of the U.S. and into the Latin American countries.
Interest-Rate Gaps
Mexico may cut its benchmark overnight rate to 9 percent by year-end, said Gray Newman, chief Latin American economist at Morgan Stanley in New York. Brazil probably will cut its rate to 17.75 percent in a bid to bolster economic growth, Gavin said.
The Fed has lifted its benchmark rate for overnight lending 11 times since June 2004, to 3.75 percent from 1 percent. UBS expects the rate to climb to 4.25 percent by year-end.
Inflation is slowing in Latin America’s two biggest economies as the gains in the currencies drive down the cost of imports and as central bank interest-rate increases in 2004 and the first half of 2005 curbed consumer demand.
More: quote.bloomberg.com
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"The
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