How Would Rising Rates Affect the Region’s Banks?
Central banks in Latin America are facing increasing pressure to raise interest rates as inflation heats up in the region. Annual inflation is running above policymakers’ targets in locations including Brazil, Mexico and Chile as economic activity rebounds from the downturns wrought by the Covid-19 pandemic. How would rising interest rates in Latin American countries affect commercial banks in the region? How would higher interest rates change lenders’ loan portfolios, and which sectors would be most influenced by higher rates? In which countries of the region are commercial banks most sensitive to rising interest rates, and what will that mean for bank customers in those countries?
Theresa Paiz Fredel, senior director for Latin America Financial Institutions at Fitch Ratings in New York: “As inflation pressures materialize in some Latin American countries due to higher commodity prices, faster-than-expected economic recoveries and base effects, pressure to tighten monetary policy has begun, with Brazil, Mexico and more recently Chile already hiking policy rates. Higher interest rates in Latin America generally have a positive impact on net interest margins as commercial banks across the region remain predominantly deposit-funded, of which a material portion of these deposits are nonremunerated or low cost. The net effect on bank credit metrics will depend on the extent that higher rates contribute to deterioration of asset quality. If gradual rate increases occur along with economic and wage growth, then this could underpin higher credit growth and offset risks to borrowers’ repayment capacity, thus sustaining…”Read More
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