Morgan Stanley
2026-06-12
LatAm monetary policy: what if the Fed hikes?
Report Summary
Morgan Stanley analyzes how Latin American central banks would likely react if the Federal Reserve hikes rates. The report concludes that domestic conditions would continue to dominate monetary policy decisions across the region. Brazil's BCB would likely pause its easing cycle rather than hike, Mexico's Banxico would stay on hold unless MXN depreciates significantly, Colombia is most likely to continue tightening given elevated inflation, while Chile and Peru would remain patient. Overall, Fed tightening would raise the bar for further easing but would not imply a synchronized tightening cycle across Latin America.
Key Takeaways
- Markets have priced a 25bp Fed hike this year, while Morgan Stanley's base case is for no change in the policy rate through at least early next year.
- Brazil's BCB would likely pause after a final 25bp cut in June, with Selic reaching 14.00% by year-end 2026; the bar for outright rate hikes remains high as core and services inflation are decelerating.
- Mexico's Banxico would stay on hold unless MXN depreciates materially (USDMXN above 21/22) and long-term inflation expectations deteriorate; GDP contracted in 1Q26 with a negative output gap.
- Colombia is most likely to continue tightening among Andean nations, with inflation at 5.84% y-o-y and resilient domestic demand; the election outcome will heavily influence the size of adjustment.
- Chile and Peru would remain patient β BCCh has completed its easing cycle while BCRP holds at 4.25% β unless a prolonged Fed-hiking cycle triggers meaningful FX pressures or second-round inflation effects.
Topics Covered
Monetary Policy
Interest Rates
Federal Reserve
Latin America
Central Banks
Inflation
Foreign Exchange
Companies Mentioned
Federal Reserve
BCB (Brazil)
Banxico (Mexico)
BanRep (Colombia)
BCCh (Chile)
BCRP (Peru)
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