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Latin American central banks may need to extend already long and deep rate hiking cycles to shore up battered currencies that are threatening financial stability, Goldman Sachs Group Inc. analysts said in a report Friday.
The region’s currencies, notably the Chilean and Colombian pesos, “are still vulnerable to an intensification of recession fears, a deterioration of economic activity in China (and a subsequent further slide in commodities), or a more hawkish Fed,” Alberto Ramos, chief Latin America economist at Goldman, and colleagues wrote in a research note to investors. “Central banks will be pressed to extend already long and deep rate hiking cycles, moving the monetary stance deeper into contractionary territory, even as the growth outlooks deteriorate.”
Both Colombia’s and Chile’s peso hit record lows this month and Latin American currencies account for five of the eight worst performers among emerging market currencies tracked by Bloomberg. The currencies have been hit hard by commodity sell-offs in recent weeks while the dollar has stayed strong and fears about recession climb, the note said.
Read More: Chile Intervention Seeks Peso Stability, Central Bank Head Says
On top of tighter interest rates, central banks could be “justified” in intervening in foreign exchange markets, as Chile has done with a $25 billion injection, the note said.
The fall “adds extra fuel to an already very hot and challenging inflation backdrop, inasmuch as significant and very rapid currency weakening will soon pass-through to domestic prices and trigger further unmooring of inflation expectations,” they wrote.
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