Latin America central bank divergence on display

Summary

Global monetary policy divergences have been apparent this year, and Latin American central banks are playing a large role in policy interest rates being adjusted in different directions. Recently, and in the coming days and weeks, diverging directions for interest rates across the region have been on display as Brazil raised interest rates, Chile kept rates unchanged and Mexico is likely to cut. For now, central banks seem keen on responding to domestic economic conditions rather than the Federal Reserve, but with tariffs looming all institutions are communicating a degree of caution that could eventually result in more converging monetary policy approaches going forward.

Diverging monetary policy paths across Latin America

Brazil's central bank met last week and delivered on prior guidance in raising its Selic rate 100 bps to 14.25%. Given the 100 bps hike was telegraphed well in advance, the most relevant aspect of the March Copom was any potential forward guidance offered by policymakers. Indeed, forward guidance did prove to be the most interesting component of the March meeting. To that point, while policymakers retained a hint of data dependency, they explicitly communicated that a slower pace of rate hikes would be delivered at future monetary policy meetings. We interpreted this language as policymakers taking additional 100 bps rate hikes off the table (barring some external or domestic shock), and also that Brazil's central bank is nearing the end of its tightening cycle. At the same time, nearing the end of the tightening cycle does not necessarily mean rate cuts will be considered in the near-term. Policymakers retained a clear hawkish bias, specifically noting that upside risks to inflation are still present via loose fiscal policy and firm economic activity. Of note, we also interpret the March Copom statement as consistent with our Brazilian Central Bank (BCB) forecast profile. Leading into the March meeting, we believed policymakers would take a less hawkish stance on interest rates. Our current BCB outlook calls for a 50 bps rate hike in May and a final 50 bps hike in June, taking the Selic rate to a peak of 15.25% by the middle of this year. Given the latest communication, we see no pressing need to adjust our outlook for BCB rate hikes over the next few meetings. Also, we continue to believe the BCB will keep rates on hold at 15.25% through the end of this year and will initiate an easing cycle in early 2026.

Download the Full Report!