WASHINGTON—At the beginning of this year, Latin America’s central banks had every reason to cut interest rates. Economic growth was slowing and domestic consumption rates remained stubbornly low. Yet many central banks still apparently felt that they had limited room to act. Mexico made two small cuts before pausing in June and signaling that its 6.5 percent rate would remain in place for some time. Brazil delivered a cautious quarter-point cut in June, even as its rate remained near the two-decade high reached in 2025, with another decision looming in the coming days. Colombia went the other way, raising its rate, before holding steady last week.
The obvious reason for these changes is inflation. Central banks set a target for inflation rates in their countries and then adjust interest rates to hit that target. But inflation has been a challenge this year. In February, the conflict in the Middle East disrupted trade, driving up energy, fertilizer, and food prices around the world. While a brief ceasefire in the Iran war gave many hope that inflation would cool, the conflict’s resumption has pushed oil prices back up again.
Inflation explains only part of the story, however. Some central banks, such as the ones in Chile and Peru, can wait calmly, holding real rates (the difference between their interest rate and the inflation rate) barely above zero without market punishment. Part of the reason could be that these central banks feel less pressure, since investors largely trust these governments with their spending, decreasing the likelihood that keeping interest rates low would trigger capital flight or a failing currency. On the other hand, Brazil, where significant debt and persistent deficits leave investors less convinced, keeps one of the highest real rates in the world. Colombia’s decision to raise rates this year was widely expected after the government continued to spend more than it collected.
