LatAm to stop cutting rates in July, exit crisis fast

By Walter Brandimarte - Analysis

NEW YORK (Reuters) - Latin American economies this month are likely to see the end of the most aggressive monetary easing cycle ever, and interest rates are expected to remain at historic lows for at least six months, propelling the region out of recession faster than most world economies.

With interest rates expected to be cut as much as 4.0 percentage points in Mexico up to 7.75 percentage points in Chile, Latin American economies will feel the full impact of the monetary stimulus by the end of this year, when inflation will start to become more of a concern for central bankers.

"Monetary policy will need to walk the thin line of remaining stimulant to evade double-dip (recession) scenarios while avoiding signaling complacency, especially as recovery at the end of the year becomes more certain," said Felipe Illanes, Latin America economist at Bank of America-Merrill Lynch.

Still, monetary and fiscal stimulus will likely remain in place for a reasonable amount of time, especially as governments try to boost their popularity ahead of upcoming presidential elections.

"We don't see the beginning of the removal of the monetary accommodation while unemployment rates are going up -- and most likely they will continue to go up throughout 2010," Goldman Sachs' senior economist Alberto Ramos told Reuters Television.

In fact, the main risk for Latin America is that policy makers may leave the stimulus in place for too long, most economists agree.

Illanes advises investors to monitor the "temptation" by governments to deliver more stimulus as unemployment peaks later in the year, a development that could hurt the popularity of incumbent leaders.

Expectations of a prolonged period of low interest rates and relatively fast economic recovery are drawing a great deal of foreign investor interest into Latin America, especially to companies whose performance relies on domestic consumption.

"A lot of Brazilians had benchmark interest rates for most of their lives in high 10s. Now in the high single digits, that just opens up a whole opportunity for them to consume more durable goods," said Ed Kuczma, investment analyst at Van Eck Global, a fund manager based in New York, with $11.5 billion under management.

Small and medium-sized companies, as well as home builders, are top picks for Van Eck in Latin America.

"We've been investing more in small and mid caps, which are a direct beneficiary of the reduction in interest rates just due to the reduction of borrowing costs," Kuczma said.

In the last six months Brazil has lowered its benchmark Selic rate by 4.50 percentage points to an all-time low of 9.25 percent. The rate is expected to fall to 8.75 percent later this month, when the central bank will likely pause, but some economists do not rule out another cut in early September.

Colombia concluded its easing cycle last month, while Chile and Peru probably delivered their final cuts on Thursday, although there is a chance the Peruvian central bank could ease its monetary policy further. For details on Latin American benchmark rates, see table below.

Mexico will likely cut an additional 0.25 percentage points later this month, keeping its base rate at 4.5 percent for some time.

Signs of economic recovery are already sprouting in Latin America. In Brazil, the economy contracted only 0.8 percent in the first quarter from the previous period, much less than the 2.6 percent expected by economists.