Policy makers in Latin America should be careful not to “over-stimulate” their economies by lowering lending rates as the region is likely to keep growing near capacity even amid global turmoil, according to the International Monetary Fund’s top official for the region.
Nicolas Eyzaguirre, director of the fund’s Western Hemisphere department, said the World Economic Outlook being released next week should show growth in Latin America and the Caribbean this year near the IMF’s January forecast of 3.6 percent.
“The region is growing as much as it can and as much as it should,” Eyzaguirre, a former Chilean finance minister, said in a phone interview from Washington yesterday. “Generally speaking things can’t be more favorable, but risks are looming on the horizon.”
Those risks include a deterioration of the Euro area economy or a faster-than-forecast deceleration in China, a top buyer of South American commodities like copper and iron ore. Rather than cutting borrowing costs if global financial instability resumes, policy makers should take alternative steps to sustain liquidity without boosting demand, he said.
“Economies have enough stamina to grow at about potential growth without idle capacity,” said Eyzaguirre, who received his doctorate in economics from Harvard University in Cambridge, Massachusetts. “Central banks should be very careful not to over-stimulate the economy.”
Policy makers in Brazil cut the benchmark interest rate to 9.75 percent last month, bringing it below 10 percent for only the second time since the central bank began targeting inflation in 1999. While the pace of price increases has slowed since August, when the bank began cutting rates, inflation has stayed above the government’s 4.5 percent target since 2010 as near record-low unemployment and double-digit credit growth fuel demand.
Mexican central bankers said in the minutes of their March policy meeting that if inflation eases, they may cut borrowing costs after keeping rates unchanged for about three years.
While renewed instability in Europe could spur investors to withdraw capital from Latin America, that’s a less likely scenario than the one seen in 2010, when excessive global liquidity poured into the region, Eyzaguirre said. Such a prospect could put pressure on regional currencies already trading above historical averages and lead to overheating as demand in many countries remains robust.
“Compared to other regions in the world, downside risks in South America are probably more muted and the upside risks are more possible,” he said. “There are other parts of the world where there is a lot of idle capacity, so upside risks would be welcome. In the case of Latin America, they would not be.”
South American commodity exporters, including Chile and Peru, have a high growth potential this year while Mexico is on track to exceed output capacity by “a bit,” Eyzaguirre said.
The outcome of Mexico’s presidential election poses little risk as candidates seem to have formed consensus around the basic principles of economic policy, he said.
“Macroeconomic policy in Mexico has been extremely appropriate,” he said. “They are on a very balanced growth trajectory.”
Gross domestic product in Brazil and Mexico, Latin America’s two biggest economies, will expand 3 percent and 3.5 percent respectively, according to January estimates made by the Washington-based lender.
Eyzaguirre said that an IMF and World Bank mission will probably travel to Argentina before year’s end to conduct an assessment of the country’s financial stability as agreed to by all Group of 20 members. The mission, which must be agreed to by Argentina, will probably include some basic analysis of the country’s economy, he said.
Argentina hasn’t had a so-called Article IV review of its economy, as is required of all IMF members, since 2006.
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