Latin America’s Growth Woes Laid Bare in Fresh Inflation Data

(Bloomberg) --

Inflation is receding in Latin America’s two largest economies in a fresh sign of the growth challenge facing their central banks as they slash interest rates in attempts to revive weak demand.

Mexico’s annual inflation in September slid to the lowest level since 2016, while Brazil posted surprise deflation as food costs dropped for the second straight month. Those readings fueled bets that policy makers in both countries will pump more stimulus in the face of growth rates that will fall short of 1% this year and may fail to reach 2% in 2020, according to economists’ forecasts.

While central banks in Mexico and Brazil traditionally focus on consumer price targets, tame inflation data is giving them space to pivot to economic growth that’s been hammered by a combination of slower global expansion and domestic headwinds. Brazil has struggled with double-digit unemployment and weak confidence and Mexico has been hamstrung by investor uncertainty surrounding policy decisions by President Andres Manuel Lopez Obrador.

“Both central banks have extra policy room to cut rates,” said Alberto Ramos, chief Latin America economist at Goldman Sachs. “It signals that growth has been weak, output gaps are negative, and therefore there is no risk of observing demand pull pressures on inflation over the foreseeable future.”

Economists expect a third straight quarter-point drop in borrowing costs at Mexico’s next policy meeting in November, according to the latest survey by Citibanamex, with the benchmark rate forecast to drop to 7.25% by late 2019. Analysts see annual inflation remaining near the official target of 3% through the end of the year.

Meanwhile, Brazil’s central bank is seen delivering its third-straight half-point cut later this month. Annual inflation is currently running at 2.89%, well below this year’s target of 4.25%.

Escaped Recession

Mexico narrowly escaped recession in the first half of the year, and the central bank has warned that risks for the economy remained tilted toward slower-than-expected growth. In addition to private investment, public spending has waned amid an austerity push by the president in his fight against corruption. That’s weakened a second engine for economic expansion.

MEXICO REACT: Lower Sept. Inflation Supports Slow Policy Easing

Brazil President Jair Bolsonaro’s administration is also cutting costs where possible in efforts to fulfill pledges of controlling debt and bolstering fiscal accounts. Meanwhile, the country’s jobless level has remained stuck above 10% for over three years, and many companies are still holding back on investments despite the government’s pro-business stance.

What Our Economist Says

“We are going to see in Mexico something like what we have seen in Brazil. That is: weak domestic demand and economic growth consistent with a negative and widening output gap; falling inflation, from high levels as a result of increasing economic slack; the combination of negative output gap, and falling inflation allowing the central bank to cut interest rates. Expectations for rate cuts in Brazil have consistently increased. Something similar is likely in Mexico.”
--Felipe Hernandez, an economist at Bloomberg Economics

BRAZIL REACT: Sept. Deflation to Fuel Bets on Aggressive Easing

To be sure, Brazil and Mexico are far from the only countries in the world that are cutting borrowing costs amid waning growth. The Federal Reserve Bank has cut interest rates twice this year to shelter the U.S. economy, and emerging markets from Russia to Chile have also lowered borrowing costs.

“Low domestic inflation, soft growth and global monetary accommodation are providing valuable room for central banks to turn to domestic financial conditions,” said Goldman Sachs’ Ramos.

To contact the reporters on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net;Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Matthew Malinowski

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