(Reuters) - Brazil's central bank signaled on Thursday it would rely less on higher interest rates while Chile tried to brake its strong currency, underlining the dilemma Latin America's policymakers face between fighting inflation and preserving competitiveness.
Latin American economies and emerging markets throughout the world are struggling to rein in currency rallies resulting from their robust growth rates and strong inflows, while trying to keep inflation from eating into economic gains.
A global rise in food prices and a recent spike in oil on ongoing violence in North Africa and the Middle East have exacerbated concerns about rising prices and put more pressure on central banks to tighten monetary policy.
Peru's central bank raised rates to 3.75 percent from 3.5 percent on Thursday in what it called a preventative move given rising global food and energy prices.
The country's currency, the sol, closed at a three-week high on Thursday, despite recent central bank intervention in which it bought $130 million on February 10.
"The challenges everybody's facing are common across the region: A lot of inflation because of the commodities shock, which this time around has been in many ways more challenging because all these countries, including Brazil, have been unwilling to allow their currency to appreciate," said Tony Volpon, head of Americas emerging market research for Nomura Securities.
Brazilian policymakers sent yields on interest rate futures contracts tumbling on Thursday by signaling they will rely more on credit curbs than rate hikes to keep a lid on inflation.
CURRENCY CONCERNS
Economists credited a hike in Brazilian bank reserve requirements in December with helping slow bank lending in January, after a 20.5 percent jump in 2010.
While that surge in credit helped the economy grow last year at its fastest clip since 1986, it also pushed up inflation to a six-year high at the end of 2010.
In minutes from last week's rate-setting meeting, released on Thursday, the bank noted that momentum from last year's consumer price index has continued.
The bank has lifted its benchmark Selic rate twice already this year, to 11.75 percent last week after a rise to 11.25 in January from 10.75 percent.
The rate hikes have helped keep the currency, the real, near pre-crisis levels -- a drag on industry, which has had to compete with a wave of cheap imports.
With some of the world's highest growth rates last year, including an 8.8 percent jump in Peru and a 7.5 percent surge in Brazil, Latin America is weighing how to keep growth steady without overheating.
"Everyone is growing," said Kathryn Rooney Vera, emerging markets strategist at Bulltick Capital Markets. "Then you have the imported inflationary pressures from food and oil prices. Those risks, you can't underestimate them because a lot can happen in terms of the price of oil."
Chile's central bank said on Thursday it would allow more foreigners to issue bonds in pesos in the domestic market as it seeks to battle a sharp rally in the country's currency, the peso. The currency has rebounded after it fell on a $12 billion currency intervention program introduced in January.
The new measure would stoke demand for dollars in the longer term, Finance Minister Felipe Larrain said.
Analysts still see Chile's policymakers raising interest rates next week as their year-end inflation forecasts also rise, according to a central bank poll.
Source: Reuters
www.reuters.com
Latin American economies and emerging markets throughout the world are struggling to rein in currency rallies resulting from their robust growth rates and strong inflows, while trying to keep inflation from eating into economic gains.
A global rise in food prices and a recent spike in oil on ongoing violence in North Africa and the Middle East have exacerbated concerns about rising prices and put more pressure on central banks to tighten monetary policy.
Peru's central bank raised rates to 3.75 percent from 3.5 percent on Thursday in what it called a preventative move given rising global food and energy prices.
The country's currency, the sol, closed at a three-week high on Thursday, despite recent central bank intervention in which it bought $130 million on February 10.
"The challenges everybody's facing are common across the region: A lot of inflation because of the commodities shock, which this time around has been in many ways more challenging because all these countries, including Brazil, have been unwilling to allow their currency to appreciate," said Tony Volpon, head of Americas emerging market research for Nomura Securities.
Brazilian policymakers sent yields on interest rate futures contracts tumbling on Thursday by signaling they will rely more on credit curbs than rate hikes to keep a lid on inflation.
CURRENCY CONCERNS
Economists credited a hike in Brazilian bank reserve requirements in December with helping slow bank lending in January, after a 20.5 percent jump in 2010.
While that surge in credit helped the economy grow last year at its fastest clip since 1986, it also pushed up inflation to a six-year high at the end of 2010.
In minutes from last week's rate-setting meeting, released on Thursday, the bank noted that momentum from last year's consumer price index has continued.
The bank has lifted its benchmark Selic rate twice already this year, to 11.75 percent last week after a rise to 11.25 in January from 10.75 percent.
The rate hikes have helped keep the currency, the real, near pre-crisis levels -- a drag on industry, which has had to compete with a wave of cheap imports.
With some of the world's highest growth rates last year, including an 8.8 percent jump in Peru and a 7.5 percent surge in Brazil, Latin America is weighing how to keep growth steady without overheating.
"Everyone is growing," said Kathryn Rooney Vera, emerging markets strategist at Bulltick Capital Markets. "Then you have the imported inflationary pressures from food and oil prices. Those risks, you can't underestimate them because a lot can happen in terms of the price of oil."
Chile's central bank said on Thursday it would allow more foreigners to issue bonds in pesos in the domestic market as it seeks to battle a sharp rally in the country's currency, the peso. The currency has rebounded after it fell on a $12 billion currency intervention program introduced in January.
The new measure would stoke demand for dollars in the longer term, Finance Minister Felipe Larrain said.
Analysts still see Chile's policymakers raising interest rates next week as their year-end inflation forecasts also rise, according to a central bank poll.
Source: Reuters
www.reuters.com
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