Although Brazil was the first to raise interest rates, Chile could be the first in Latin America to lower them

RIO DE JANEIRO, BRAZIL – Chilean swaps expect a rate cut in December, and the latest survey of financial players published by the central bank confirms this assessment. Borrowing costs are expected to peak between 9.25% and 9.5% in the next three months and then fall by 25 basis points within six months.

In Brazil, swaps point to the start of an easing cycle in the first quarter of next year.

South American central banks were among the first in the world to tighten monetary policy last year and are likely to be among the first to cut rates. Monetary authorities in Chile and Brazil have already moved to cautious restraint, even as inflation reaches new highs.

Now investors are anticipating an end to rate hikes, and the inverted yield curves in both countries point to a policy reversal soon.

“Chile will probably be the first country in the region to lower rates, as the swap curve expects lows in TPM in the fourth quarter of the year,” said Sebastián Ide, head of the money desk at Banco de Chile.

“The most likely scenario is faster and more aggressive rate cuts, with reductions between 75 and 100 basis points or even more, with the recession scenario overweighted against inflation,” he added.

Although Chile only started raising rates in July, four months after Brazil, it may be able to reverse policy sooner because of its much lower country risk. The Andean nation is rated “A” by all three major rating agencies, meaning it can attract investors by paying significantly lower interest rates than Brazil, which has a lower status.

Benchmark interest rates are 8.25% in Chile and 12.75% in Brazil.

Growth is also slowing dramatically in Chile. After growing 4.3% and 1.7% in the third and fourth quarters, respectively, compared to the previous three months, the economy contracted 0.8% in the first quarter.

Brazil will release gross domestic product (GDP) for the first three months of the year next week.

“We see an increasing probability of the economy going into recession in 2023″, said Samuel Carrasco, senior economist at Credicorp Capital in Santiago. That raises the possibility of a rate cut in the fourth quarter, although the base case remains the first quarter of 2023, he said, adding that the cuts will be “aggressive,” with a cut of 150 to 200 basis points in the first three months of 2023.

Brazil may have a harder time than Chile containing inflation, as prices in Latin America’s largest economy have risen an average of 6.7% a year since 2002, compared with just 3.4% in Chile.

We expect the central bank to start the easing cycle in May 2023,” Credit Suisse analysts, including chief economist Solange Srour, said in a report on Brazil. “However, there is a risk that the easing cycle will start later, as the disinflation process could take longer than we currently expect,” she added.

Indeed, recent inflation readings have shown that investors in both countries may be too optimistic. Chilean inflation accelerated to 10.5% in April, more than triple the 3% target and in contrast to estimates of 10.1%.

Brazil’s IPCA-15 inflation index accelerated more than expected to 12.2% y/y in the first half of May, above the central bank’s target of 3.5% for the year. Uncertainty over global growth, commodity volatility and the geopolitical situation in Europe may also force traders to revise their bets.

“Amid near-term price pressures and stronger-than-expected consumption, Standard Chartered Bank analysts Dan Pan and Erwin He raised their forecast for year-end interest rates in Chile to 9.5% from 8.5% on May 26. This would delay rate cuts until 2023.

With information from La tercera

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