Monetary policy divergence in Latin America

The Banco Central do Brasil's (BCB) Monetary Policy Committee (Copom) raised the Selic rate by 25 basis points to 15.00%, judging that a restrictive monetary policy is necessary to anchor inflation expectations and to return inflation to target. Copom assessed that economic conditions remain characterised by de-anchored inflation expectations, high inflation projections, resilient domestic economic activity and pressure in the labour market. Additionally, international conditions are seen as highly uncertain, particularly due to US trade and fiscal policy and geopolitical tensions.

Copom also believes that risks to the inflation outlook, both upward and downward, remain elevated. As a result, it intends to pause further increases to the Selic rate to assess the cumulative effects of past tightening but remains prepared to resume raising interest rates if inflation does not converge as expected.

At its June meeting, the Central Bank of Chile (CBC) decided to leave interest rates unchanged at 5%, citing a balance of risks to both domestic and external conditions. In its view, global uncertainty remains high, driven by escalating trade tensions and the conflict in the Middle East. However, the CBC noted that the potential impact of these on the Chilean economy are low.

Chile’s central bank judged that domestic economic activity had been stronger than expected in the first quarter, particularly in the export-related sector and in services. Although copper prices have increased since the last policy meeting, boosting exports, so too have oil prices, impacting imports. Inflation has behaved according to projections and upside risks, particularly in the first part of the year, have receded. Both headline and core inflation have declined over the last months, with inflation expectations anchored at 3% over the next two years.

However, job creation has slowed, and unemployment has risen, despite continued moderate wage growth. The CBC maintained that if its baseline forecasts materialised, the policy rate would gradually be lowered to neutral levels. It emphasised that future decisions would depend on the evolution of macroeconomic conditions and their implications for inflation.

Comparison

Both central banks acknowledged a highly uncertain global environment shaped by US trade and fiscal policy, and geopolitical tensions around the Middle East. Both institutions saw these developments as important external risks for emerging markets and stressed the need for caution in setting policy. Domestically, the two central banks faced different conditions, triggering a divergence in their policy responses. The CBC opted to hold its policy rate at 5%, viewing inflation as broadly in line with projections and recent upward risks as having moderated. Anchored inflation expectations and declining core inflation have allowed them to maintain rates at 5% since the start of 2025.

By contrast, the BCB faces a more difficult domestic situation, with inflation at 5% far above both the 3% target and the 4.5% upper limit of the tolerance interval.¹ The BCB consequently raised its Selic rate to 15%, citing persistent inflationary pressures, de-anchored inflation expectations, and the need for a prolonged restrictive monetary policy stance. While the CBC signalled that policy might soon approach neutral, the BCB viewed a tight monetary stance as essential for achieving medium-term inflation convergence. This contrast reflected differing inflation dynamics and policy responses across the two economies.

¹Although the BCB has an inflation target of 3%, it has set up a tolerance band 1.5 percentage points above and below the target, where inflation would be accepted.

Important Information

The value of investments and the income derived from them can fall as well as rise, and past performance is no indicator of future performance. Investment products may be subject to investment risks involving, but not limited to, possible loss of all or part of the principal invested.

This document does not constitute and shall not be construed as a prospectus, advertisement, public offering or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. It is not intended to be a final representation of the terms and conditions of any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction. The information in this document does not take into account the specific investment objectives, financial situation or particular needs of the recipient. You should seek your own professional advice suitable to your particular circumstances prior to making any investment or if you are in doubt as to the information in this document.

Although information in this document has been obtained from sources believed to be reliable, no member of the EFG group represents or warrants its accuracy, and such information may be incomplete or condensed. Any opinions in this document are subject to change without notice. This document may contain personal opinions which do not necessarily reflect the position of any member of the EFG group. To the fullest extent permissible by law, no member of the EFG group shall be responsible for the consequences of any errors or omissions herein, or reliance upon any opinion or statement contained herein, and each member of the EFG group expressly disclaims any liability, including (without limitation) liability for incidental or consequential damages, arising from the same or resulting from any action or inaction on the part of the recipient in reliance on this document.
The availability of this document in any jurisdiction or country may be contrary to local law or regulation and persons who come into possession of this document should inform themselves of and observe any restrictions. This document may not be reproduced, disclosed or distributed (in whole or in part) to any other person without prior written permission from an authorised member of the EFG group.

This document has been produced by EFG Asset Management (UK) Limited for use by the EFG group and the worldwide subsidiaries and affiliates within the EFG group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 7389746. Registered address: EFG Asset Management (UK) Limited, Park House, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111.