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Sluggish growth spurs monetary easing across Latin America

A number of central banks in Latin America and the Caribbean have lowered borrowing costs in 2019, some of them on multiple occasions, as growth and inflation concerns continue to dog the region's largest economies.

Policymakers in Brazil, Chile, Paraguay, Costa Rica and the Dominican Republic all announced rate cuts in the first seven months of 2019, and other central banks in the region may soon follow suit.

Chile's central bank cut its benchmark rate by half a percentage point in June after a slump in the mining sector and in the price of copper, a key export for the country, precipitated slower-than-expected growth in the first quarter. At the bank's most recent meeting, one board member voted for another decrease, saying the June cut was inadequate in light of low growth expectations for the coming quarters.

Banco Central do Brasil, which presides over monetary policy in Latin America's largest economy, delivered a cut of 50 basis points in July as growth forecasts remained grim despite preliminary approval for long-awaited pension reform. The last major consumer price reading before that decision showed that in mid-July, annual inflation was nearly a full percentage point below the bank's 2019 target of 4.25%.

Meanwhile, the central banks of Costa Rica, Paraguay and the Dominican Republic have cut rates on four, three and two occasions, respectively, so far in 2019, data compiled by S&P Global Market Intelligence shows.

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Further easing is on the horizon

Strategists at Deutsche Bank said in a recent report that they expect a multitude of central banks in emerging markets to provide further stimulus in the form of rate cuts in an effort to "contain the propagation of trade shocks." The U.S. Federal Reserve's July 31 rate reduction of 25 basis points also will encourage emerging-market central banks to keep dropping rates, Angus Bell, a portfolio manager at Goldman Sachs Asset Management, told Bloomberg News.

Although Brazil's benchmark Selic rate already stands at a record-low 6.0%, policymakers have left the door open for more cuts before the end of the year, in line with market expectations. Peru's central bank, whose next monetary rate decision comes Aug. 8, has indicated it is also considering lowering rates.

While Banco de México has not cut rates since 2014, a deteriorating growth outlook coupled with the Fed's decision suggest that looser policy may be imminent. "Mexico will eventually cut rates dramatically," Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management, told Bloomberg.

The country narrowly avoided a technical recession after growing just 0.1% in real terms in the second quarter. Only a day before those figures were released, President Andrés Manuel López Obrador said the central bank should slash interest rates to jumpstart the economy — at least two of the bank's board members believe such a move may be justified. The Mexican central bank, which left its rate unchanged at 8.25% when it last met, is next scheduled to meet in mid-August.

Colombia's central bank, however, might not immediately join its regional peers in the easing cycle. "We expect a weaker Colombian peso to push inflation up in the coming months, leaving no room for rate cuts," research firm Capital Economics said in a recent report.

The easing in Latin America is occurring alongside a dovish push by central banks across the globe. South Africa, Indonesia, New Zealand, Turkey, South Korea, India, Malaysia and the Philippines have all lowered rates in recent months.