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. 
 

Chart 1. Chile inflation and Monetary Policy rate

Source: Banco Central de Chile and EFGAM. Data as of 20 June 2025.

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. 
 

Chart 2. Brazil inflation and Selic rate

Source: Banco Central do Brasil and EFGAM. Data as of 20 June 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.

¹ Although 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.