Wednesday, 4 February 2009

Barclays Expects Aggressive Monetary Policy Front-Loading Across Latin America

Barclays Capital economists say that Latin America ''is in many ways treading through uncharted territory.´´ Policymakers are taking chances, ignoring the pass-through impact of recent declines in their countries' currencies against the dollar, and cutting rates or increasing liquidity rapidly to stave off the effects of the global recession. ''For these reasons, which add to the unusual high headline inflation of 2008, policy responses have been slower to materialize,´´ the bank said in a report released Friday. ''As data continue to come out in coming weeks, we expect policies to become bolder and further front load rate cuts.´´

There are at least three key factors behind this policy response, Barclays says.
First, the currency depreciations in Latin America have been smaller than that in the U.S. dollar for the past years. Second, plunging commodity prices are contributing to keeping local prices tamed. And third, the economic deceleration is reducing pricing power by firms and retailers. The data for industrial production in Brazil, which was released yesterday and showed a drop of almost 15 percent on the year-on-year reading, represents a ''good example of the magnitudes involved.´´

The implication is straightforward: monetary policy should lean against the wind in this juncture. Therefore, aggressive easing should continue in the region, according to the shop.

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