Latin Finance - September/October 2010 - 41

central bank scorecard

dealt its own blow to growth prospects by February’s earthquake. With the lowest rate among the region’s major economies coming out of the crisis – sitting at 0.50% since August 2009 – the central bank began tightening in June with a 50 basis point hike. It followed with another rise in July, to 1.50%. The expectation is for additional raises, with some analysts expecting rates to hit 3.0% by year end. “The management of monetary policy through the earthquake has been exemplary in that they didn’t get carried away,” says Rafael de la Fuente, senior economist for Mexico and Chile at UBS. “Unlike market players that rushed into making quick decisions about the outcome of the earthquake, they didn’t panic.” De la Fuente attributes Chile’s continued strong growth in part to this prudence. He says the bank is aware that there is still too much stimulus in place, and will act accordingly to remove it. The central bank’s reference to significant monetary stimulus and still favorable external scenario facing the country suggested a continuation of the 50 basis point increase at the August meeting, RBS says. Inflation has remained under 1% this year, reaching 1.2% in June, according to Trading Economics.

August 2009 before starting hikes in April, many in the market also thought it might have started raising sooner. In its explanation of the July move, Banco Central do Brasil indicates that deceleration of growth and inflation pressures in previous months should become a trend. What flustered so many in the markets was that this seemed to be a sharp reversal from its view at the previous Copom meeting and to an inflation report issued for the second quarter.

Central Bank Rankings
A tight race for top Rank 1 2 3 4 5 6 7 8 Bank Mexico Chile Brazil Peru Colombia Uruguay Costa Rica Guatemala Head Agustín Carstens José de Gregorio Henrique Meirelles Julio Velarde José Darío Uribe Mario Bergara Rodrigo Bolaños Maria Antonieta Del Cid

Source: LatinFinance

Real Overheating Test

Brazil, last year’s winner, is praised as one of the top institutions in the region, with shrewd handling of its foreign exchange rate. It also still basks in the overall glow of being among the fastest emerging economies to hit positive growth after the height of the crisis had passed. However, it faces an expansion outlook pushing 8% for 2010 that has some analysts worrying about overheating. The Brazilian central bank’s 50 basis point tightening in July left a bad taste in the mouths of market watchers who were expecting 75 points. The move was seen as poorly communicated, in stark contrast to the past, when Brazil had been praised for communicating intentions ahead of time. With rates steady at 8.75% since

Noise around Governor Henrique Meirelles’ apparent political aspirations did not help. In April, Meirelles appeared to reject talk of running for governor in his home state of Goiás, or possibly for vice president on PT candidate Dilma Rousseff’s ticket, opting to stay at the central bank job. Joining Rousseff was initially viewed as market positive, since she began to lead in polls. However, the fact that he stayed is seen as having a stabilizing influence on Brazilian markets heading into October’s presidential election.

Decisiveness in Lima

Peru’s central bank is seen as having faced less of a challenge than the three larger economies, given a relatively high level of dollarization. The institution has gotten credit, however, for decisiveness during the easing cycle and having foresight to start to remove part of

the monetary accommodation as the economy continues to recover. The bank began to hike rates in May from a 1.25% plateau it held at since August, reaching 2.00% in July. The bank is seen raising rates to 3.00%-3.25%. Alongside Mexico, Colombia is another large LatAm economy that has not yet started rate increases. The benchmark was at 3.0% early August, following a 50 basis point cut in March. The bank appears confident that inflation, at 2.25% in June and under 3.00% since October, will remain within its 2.00-4.00% forecast in 2010. Analysts expectations range from holding steady to an increase in rates by the end of the year. Both Colombia and Peru are seen as making safe, prudent decisions, though in less challenging circumstances than the top three. Uruguay, Costa Rica and Guatemala – with the more active banks among the region’s smaller economies – round out the leader board. A continued lack of independence puts the central banks of Ecuador, Venezuela and Argentina squarely at the bottom of the regional rankings. Since this trio works as little more than an additional tool in the arsenals of their countries’ respective executive branches, they are excluded from the line up. Shenanigans in Buenos Aires earlier this year land Argentina squarely at the bottom, in the eyes of those surveyed. Governor Martín Redrado was ejected in February after he refused to let the central bank’s reserves be used as a debt repayment tool. The Kirchner administration sought to reconcile with international investors and regain access to international borrowing. The executive branch got its way, replacing Redrado with Kirchner ally Mercedes Marcó del Pont, and won access to $6.6 billion of the bank’s reserves. In addition to a dangerous precedent for the institution’s independence, economists also worry about an unhealthy expansion of the monetary base and an increase in inflation. The official rate hit 11.00% in June, according to Trading Economics, and the unofficial rise is considered to be even higher. LF

September/October 2010

LatinFinance 41

Latin Finance - September/October 2010

Table of Contents for the Digital Edition of Latin Finance - September/October 2010