Investors go from too hawkish to too dovish

Investors have rapidly come round to our dovish view on Latin American monetary policy but, if anything, they have probably now gone too far in anticipating large rate cuts across the region over the next year or so. Brazil’s Copom is likely to trim the Selic rate in the coming months but the 100bp of easing investors are now pricing in looks difficult to justify. Similarly, the rate cuts now expected in Chile and Colombia are unlikely to materialise, particularly in the latter given the large and widening current account deficit. The exception is Mexico, where we think investors are still underestimating the scale of interest rate cuts over the next few years.