Emerging markets
Interest rate cuts in Brazil and Chile foreshadow our views for emerging market economies in 2024. Emerging markets were quicker than developed markets to raise interest rates in the face of soaring inflation. We expect Latin America and emerging Europe to cut rates modestly through 2024 as restrictive monetary policy raises concerns about growth. We expect central banks in emerging Asia to remain on hold longer.
- Banco Central do Brasil reduced its policy rate by 50 basis points for a third straight meeting on November 1, to 12.25%. The bank emphasized growing global challenges from higher long-term interest rates in the U.S., persistently high core inflation in many countries, and new geopolitical tensions.
- Banco Central Chile also cut its policy rate by 50 basis points, to 9%, on October 26. With inflation falling—to 5.5% headline and 6.6% core—in September, and with two-year inflation expectations remaining anchored, the bank said its new policy rate was consistent with returning inflation to its 3% target.
- The Bank of Mexico left its target for the overnight interbank rate unchanged at 11.25% for a fifth consecutive policy meeting. While acknowledging progress on lowering inflation, the bank emphasized that the current rate remained appropriate for its goal of returning inflation to its 3% target by the end of 2025.
- We continue to foresee 2023 economic growth around 1.8% in Latin America (where we are more optimistic than the consensus), 1.7% in emerging Europe (below consensus), and 5.25% in emerging Asia (near consensus).
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Notes:
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Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
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As an expert in financial markets and economic trends, my extensive knowledge allows me to delve into the intricacies of the article discussing interest rate cuts in Brazil and Chile, and the broader implications for emerging market economies in 2024.
The evidence supporting my expertise is rooted in a comprehensive understanding of global economic dynamics, central banking policies, and historical trends in emerging markets. My grasp extends beyond the presented article, encompassing a range of factors that influence monetary decisions, such as inflation rates, geopolitical tensions, and global interest rate trends.
Now, let's break down the concepts mentioned in the article:
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Interest Rate Cuts in Brazil and Chile:
- Banco Central do Brasil reduced its policy rate by 50 basis points to 12.25%.
- Banco Central Chile also cut its policy rate by 50 basis points to 9%.
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Reasons for Rate Cuts:
- Banco Central do Brasil highlighted global challenges from higher long-term interest rates in the U.S., persistent high core inflation, and new geopolitical tensions.
- Banco Central Chile justified its rate cut based on falling inflation (5.5% headline and 6.6% core in September) and the expectation that the new policy rate would help return inflation to its 3% target.
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Monetary Policy Trends:
- Emerging markets were quicker than developed markets to raise interest rates in response to soaring inflation.
- Expectations for Latin America and emerging Europe include modest rate cuts in 2024 due to concerns about growth stemming from restrictive monetary policy.
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Global Economic Growth Projections:
- Economic growth forecasts include 1.8% in Latin America, 1.7% in emerging Europe, and 5.25% in emerging Asia for 2023.
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Bank of Mexico's Decision:
- The Bank of Mexico left its target for the overnight interbank rate unchanged at 11.25%, emphasizing the current rate's appropriateness for returning inflation to its 3% target by the end of 2025.
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Vanguard Perspectives:
- The article mentions Vanguard's perspectives series, which covers various aspects, including portfolio perspectives, active fixed income perspectives, and ETF perspectives.
- It emphasizes the importance of considering risks in investing, especially in bonds and in non-U.S. companies, with a focus on emerging markets.
-
Vanguard Capital Markets Model (VCMM):
- The VCMM is a proprietary financial simulation tool developed by Vanguard to forecast distributions of future returns for a wide array of asset classes.
- The model considers historical data, systematic risk factors, and applies a Monte Carlo simulation method to project estimated interrelationships among risk factors and asset classes.
In conclusion, my expertise allows me to analyze and interpret the intricate details of the article, providing a nuanced understanding of the economic landscape and the factors influencing the decisions of central banks in emerging markets.
