Latam currencies slip, Brazil’s real falls ahead of C.bank decision

Updated at 3:24 p.m. EDT/ 1924 GMT

By Sruthi Shankar and Shristi Achar A

June 19 (Reuters) –A gauge of Latin American currencies dipped on Wednesday, with the Brazilian real falling to a fresh five-month low against the dollar as traders braced for a pause in the central bank’s monetary-easing cycle amid higher inflation expectations.

The real BRL= weakened to 5.4556 per dollar, hovering near its lowest level since early January.

The MSCI index for Latin America currencies .MILA00000CUS slipped 0.5%, as most currencies in the region, including the Mexican peso MXN=, also dipped in light trading due to a U.S. market holiday.

Brazil’s central bank is widely seen leaving the benchmark Selic rate at a still-high 10.50%, according a Reuters poll, ending a series of six 50-basis-point rate cuts, which it kicked off last year.

The focus now is on how long the pause will last, after surprisingly strong consumer price data in May sealed the case for a possible decision to keep rates unchanged.

“The easing cycle is already over, based on market pricing. We believe there is one final 25bp (basis-point)rate cut but it is a close call. The important thing, however, is that real policy rates would remain at a contractionary level for the rest of the year,” BofA analysts said in a recent note.

“Even with a 25bp rate cut to 10.25%, the ex-ante real rate would be around 7.3%, well above the 4.5% the central bank views as neutral.”

Brazil President Luiz Inacio Lula da Silva criticized the central bank on Tuesday, saying its chief, Roberto Campos Neto, was harming Latin America’s largest economy, while signaling he will appoint a substitute who is not swayed by market jitters.

With a more than 10% drop this year, the real is among the worst-performing currencies in the region, hurt by increasing fiscal worries and a drop in speculative flows due to a reduction of spreads between Brazilian and U.S. interest rates.

The Chilean peso CLP= bucked the larger trend to add nearly 0.7% as copper prices climbed and the central bank raised its GDP and inflation forecast for 2024.

Chile’s central bank lowered its benchmark interest rate by 25 basis points to 5.75% on Tuesday, in line with market expectations, in a bid to boost the South American country’s economy.

“Our base case is that cuts will likely continue in the near term — with some pauses along the way — with the rate falling further to around 5.0% by Q4, and 4.0% in 2025,” noted Andres Abadia, chief LatAm economist at Pantheon Macroeconomics.

Key Latin American stock indexes and currencies:

Reporting by Sruthi Shankar and Shristi Achar A in Bengaluru; Editing by Rod Nickel and Josie Kao