In addition to the mechanics of interest rates, the issue of exchange rate stability has been a reflection of inflationary control as well as market confidence. Exchange rate stability in Latin America has been quite disparate among countries.
As Latin America begins the new year of 2026, one of the most important questions echoing down the economic highways of the region is: have central banks been successful in managing the inflationary pressures that have beset the region over the past few years? The answer is not a simple one. While it is true that the region has made tremendous strides in managing the inflationary pressures, the truth is that the war is far from over. In the leading economies of Latin America, such as Brazil, Mexico, and Chile, the central banks have used every trick in the book, from high interest rates to clever public relations, and the early signs are now being put to the test by the changing global economic trends.
The key participants in the scenario of managing inflation are the regional policy interest rates. In Brazil, the Central Bank (Banco Central do Brasil) kept the Selic rate at a relatively higher level of 15% towards the end of 2025. This was because of the conservative approach of the central bank to keep its control over the inflationary pressures. According to reports, the inflation forecast for 2026 was expected to return to 3.6%, thus shifting away from the double-digit inflation rate that was experienced in the past years. The present high-interest rate regime has been able to keep the price stability, but at the expense of slowing down the economic growth.
The Mexican experience, on the other hand, offers a slightly different situation. The Bank of Mexico, also known as Banxico, was operating under a series of interest rate changes in 2024 and 2025, where it increased its policy rate to around 7% and then further decided to maintain it at this level as the inflation eased. However, the latest available data as of early February 2026 showed that the annual inflation in Mexico had increased to 3.92%, slightly above the expected levels and beyond Banxico’s target range of 3% ±1%. This situation, particularly in the core inflation that does not include food and energy prices, shows that the inflationary pressures are yet to ease, making it difficult for Banxico to come to any kind of decision regarding further interest rate cuts. It has been pointed out that, although there is room for a further easing of monetary policy in the second half of the year, the short-term prospects for interest rate cuts are not very promising in the wake of inflationary pressures.
Chile, on the other hand, is a country that symbolises one of the more successful experiences in the region in the context of the management of inflation. According to the Monetary Policy Report published by the Central Bank of Chile, the headline inflation was expected to return to its target of 3% in the first quarter of 2026, due to the slowdown in inflationary pressures and a stable demand environment. The Central Bank has been following a strategy of lowering the monetary policy rate in a gradual manner, taking into account the reduction in inflation, and this has ensured that the inflation expectations are aligned with the target, thereby ensuring domestic confidence in the policy framework.
In addition to the mechanics of interest rates, the issue of exchange rate stability has been a reflection of inflationary control as well as market confidence. Exchange rate stability in Latin America has been quite disparate among countries. The Brazilian real, for example, has had instances of volatility in response to external trade balances as well as inflationary expectations, although the policy measures of the central bank have at times moderated extreme volatility. On the other hand, the Mexican peso has been aided by its flexible exchange rate regime, which has been able to mitigate external shocks, although the changes in the strength of the US dollar have at times challenged its stability.
The Chilean peso has comparatively performed better due to its strong export sectors in mining and commodities, as well as strong macroeconomic fundamentals. In the balance of the region, other countries such as Argentina have tougher conditions in maintaining the stability of their currencies. The inflationary history of Argentina and the current process of policy reform, such as the relaxation of currency controls, offer a complex scenario of risks and opportunities. Although some of these policies have been praised for their capacity to improve access to foreign currencies and investments, the journey to stability for the peso is still being undertaken.
Fiscal consolidation has been a significant supporting element in the fight against inflation in Latin America. Fiscal imbalances are often the root cause of inflation, and countries that have made progress in credible fiscal consolidation policies have been better positioned to withstand the pressures of inflation. In Chile, the various attempts at closing fiscal deficits through copper revenues and structural policies have emphasised the commitment to sound fiscal policies. It has been noted that while the fiscal deficit is not yet in a completely neutral stance, the trend towards fiscal consolidation has further improved macroeconomic stability and supported monetary policy in fighting inflation.
The Brazilian fiscal situation remains an important factor in the discussion of monetary policy. With the high levels of public debt and the fiscal situation, policies that aim at ensuring the sustainability of the public finances have implications for market sentiment. Fiscal responsibility in such a situation is important but has to be done in a way that does not affect growth through fiscal consolidation policies.
In the case of Mexico, the fact that the country has fiscal responsibility laws and a well-regulated financial system has been pointed out by international organisations as a factor that contributes to the resilience of the economy. The flexible credit line that Mexico has with the IMF, renewed in 2025, also demonstrates that the international community is confident in the macroeconomic framework of the country, despite the controversy over the pace and depth of fiscal consolidation.
