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Key rates in Latin America drop in 2019 to stave off stagnation

Central banks across Latin America and the Caribbean reduced interest rates dramatically during the course of 2019, joining a global monetary easing cycle in an effort to reignite economic growth by stoking demand for credit.

Rate cuts in Brazil and Mexico, the two largest economies in the region, came as both countries flirted with recession in the first half of the year. Although Brazil narrowly avoided a technical recession by posting growth of 0.4% for the second quarter, revised figures for Mexico showed the economy contracting in all three quarters through June 30, 2019.

Banco Central do Brasil and Banco de México announced four rate cuts each in 2019, with borrowing costs falling one percentage point to 7.25% in Mexico and declining two percentage points to 4.5% in Brazil. Mexico's rate cut of 25 basis points in August 2019 was its first reduction in more than five years, while Brazil's decision a month earlier was its first cut in more than a year.

Both nations could see further easing in 2020. When it announced its last rate cut of 2019 in December, Brazil's central bank said current economic conditions still warrant "stimulative" monetary policy. Mexico's central bank, meanwhile, is likely to announce additional rate cuts in the first half of this year given that the balance of risks to growth are tilted to the downside, Goldman Sachs economist Alberto Ramos said in a research note.

In Chile, favorable macroeconomic conditions and a stable currency provided local policymakers enough room to begin 2019 with a small rate hike. However, adverse developments during the rest of the year forced Banco Central de Chile to reverse course.

The central bank announced three rate cuts in the last seven months of 2019 amid a decline in the price of copper, which is Chile's top commodity export, and a downturn in the broader mining sector. Furthermore, violent protests over social inequality that erupted in mid-October effectively paralyzed some sectors of the economy and prompted a $20 billion intervention program to support the country's falling peso currency.

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Elsewhere in Latin America and the Caribbean, the central banks of Costa Rica, the Dominican Republic, Peru and Paraguay all lowered their benchmark rates multiple times in 2019. Banco Central de Costa Rica cut borrowing costs seven times last year, putting the rate at 2.75% at the close of the year, according to data compiled by S&P Global Market Intelligence.

The World Bank warned in October 2019 that the Latin America and Caribbean region has entered into "a new phase of weak economic performance," saying that limited fiscal space in some countries leaves little room to stimulate domestic demand. Excluding Venezuela, the international institution expects the region to grow just 0.8% in 2019.

In recession-hit Argentina, where the World Bank predicts economic contractions of 3.1% in 2019 and 1.2% in 2020, the administration of new President Alberto Fernandez has been tasked with returning the economy to growth, combating rampant inflation and dealing with creditors as the country heads into debt-restructuring talks.

Argentina's benchmark Leliq rate remained well above 50% for most of 2019, creating an environment of very low credit demand. The country's struggling peso currency, meanwhile, closed the year down roughly 37% against the U.S. dollar.

Banco Central de la República Argentina reduced the floor for the Leliq rate twice in December 2019, first to 58% and then to 55%. Both decisions were taken after Fernandez appointed Miguel Pesce to replace Guido Sandleris as the central bank's chief.

Latin American central banks were not alone in cutting rates in 2019. Policymakers in a number of countries, including South Africa, Indonesia, New Zealand, Turkey, South Korea and India, among others, lowered rates in 2019.