The last two years in Latin America have seen differences in macroeconomic policy strategies. On the one hand, and after a marked increase in interest rates, Chile and Peru have materialized significant reductions in the price of money as their inflation has allowed. Meanwhile, Colombia and Mexico show greater resistance to materializing significant reductions in interest rates: in the first case justified by the still high inflation, in the second conditioned by the postponement of the downward cycle in the United States' monetary policy. These differences are also expressed in the fact that currently Brazil, Chile, Peru and Uruguay maintain interest rate differentials with the Federal Reserve lower than the average of the last decade, while Colombia and Mexico continue to be above. This situation will hardly be sustained for a long time and will possibly end up presenting a faster adjustment in rates in these last two countries relative to the United States, which would support a possible weakening of their currencies. On the other hand, Chile and Peru will have little room for monetary maneuver, and will largely follow the North American country in its monetary cycle. Ultimately, this will have consequences for economic activity. In the case of Chile and Peru, the earlier reduction in rates will facilitate, among other factors, a more marked rebound in activity in 2024 to levels slightly below 3%, but with a weakening in 2025. In Colombia it will be more gradual, reaching figures close to 3% only until 2025. Mexico, like Brazil, will face this year and the next with growth somewhat lower than that observed in 2023, around 2.5% and 2.0% respectively, although above their averages for the decade prior to Covid-19. The exception will be Argentina, which is carrying out a unique macroeconomic adjustment that has led to an accelerated fiscal adjustment, a reduction from very high levels in inflation and which will translate into a significant economic contraction in 2024. However, if the adjustment program is successful, it will achieve better foundations to achieve an expansion in 2025 close to 6%. Latin America is moving towards macroeconomic normalization with inflation approaching gradually reaching the established goals, growth that converges towards its potential levels (somewhat lower than those registered pre-pandemic), and external balances around equilibrium and limited fiscal balances, reflecting a successful adjustment process. In this scenario, however, it is worth highlighting the case of Colombia, which is lagging behind in the adjustment, with a relatively high fiscal deficit and a current account imbalance significantly greater than that of its peers, which imposes some greater challenges on the coffee nation. Alejandro Reyes, BBVA Research. Follow all the information on Economy and Business on Facebook and Twitter. xor in our weekly newsletter
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