Chile Central Bank Tightens, Brazil Eases Amid Oil-Driven Uncertainty

• Chile’s Central Bank (BCCh) and Brazil’s Central Bank (BCB) took diverging policy paths last week (April 28th and 29th). The BCCh held its policy rate steady at 4.50%, while the BCB delivered a modest 25 basis point (bps) cut to 14.50%, reflecting different domestic conditions despite the shared global shock.
• Both central banks pointed to the escalating US–Iran conflict as a key driver of uncertainty, with the surge in global oil prices raising concerns about inflation, weakening growth prospects, and increasing the difficulty of setting forward-looking monetary policy.
• In Chile, the impact has been particularly acute due to the government’s decision to allow higher global oil prices to pass through to domestic fuel costs, resulting in a sharp rise in fuel prices and pushing inflation from below target (3.0%) toward a projected 5.2% by the end of 2026.
• The inflation surge comes at a fragile moment for Chile’s economy, which has already shown signs of contraction and rising unemployment. Yet the scale of price pressures is expected to force the BCCh into rate hikes, potentially lifting rates to 5.00% despite the weak growth backdrop.
• In contrast, Brazil has benefited from relatively resilient financial markets and a stronger currency, allowing the BCB to continue its easing cycle, though at a slower and more cautious pace as 2026 inflation forecasts edge higher (4.6% from 3.9% previously) and policymakers grow wary of external risks.
• That said, there are considerable risks to Brazil’s forecasts, given the uncertain global geopolitical environment and the contingency of the view on a Flávio Bolsonaro election win in October. The baseline assumes the majority of easing takes place after the election; if the opposite outcome materialises, there is likely to be a symmetric risk of hikes (particularly in the event of global energy prices remaining elevated).
• For Chile, should the war continue for longer than expected, there are both upside risks to the inflation and interest rate forecasts, given the strong pass-through of inflation into the domestic economy and the risk of destabilised inflation expectations. However, if the US and Iran can reach an accord leading to normalising prices, the BCCh could opt instead to view the external price shock as transitory, which presents little threat to the two-year inflation outlook, leading them to hold the rate at 4.50% through the end of the year.

(Source: BMI, A Fitch Solutions Company)