Diverging policy responses to rising inflation

Inflation is above target in Brazil and Mexico, with Chile set to follow in the coming months, but only in the former is the central bank likely to respond with (further) interest rate hikes. Brazil’s case reflects a combination of high inflation, a rising country risk premium and a starting point of low real rates. Central banks elsewhere, though, are likely to look through the rise in inflation, which largely reflects a transitory spike in energy inflation. We think that headline inflation will fall back towards central banks’ targets as unfavourable base effects unwind over the rest of the year, which feeds into our view that policy rates will follow a lower path than is currently priced into financial markets.