Divergent Paths Interest rates in Mexico and Chile are at
historical lows, in spite of the growing uncertainty afflicting
most of the region. Chile is located next door to Argentina,
but the Chilean Central Bank has seen no reason to aggressively
raise interest rates. On the contrary, Chile has borrowed on
the international capital markets at record low rates largely
because investors are convinced that it will not suffer any
serious contagion from its neighbor to the east. Inflation in
Mexico is also at a historically low levels and this has
allowed the Central Bank, which does not directly manipulate
short-term interest rates, to continue withdrawing liquidity
from the financial system. However, the currency in both
countries has behaved very differently. Both pesos float
freely, and although the Mexican peso has faltered recently, it
is still remarkably strong. But Chile's peso has struggled to
recover from the beating it endured...
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