Key Points
Chile Interest Rate Hold Expected as Oil Shock Hits
The Chile interest rate decision on Tuesday is expected to deliver a hold at 4.5%, as the Iran war’s oil shock has forced a complete reversal of the rate-cut path that markets had priced in just weeks ago. All 15 economists surveyed by Bloomberg expect the central bank board, led by Governor Rosanna Costa, to keep borrowing costs unchanged, The Rio Times, the Latin American financial news outlet, reports.
Why the Chile Interest Rate Cut Vanished
As recently as February, the central bank’s own analyst survey showed consensus for a cut to 4.25% at the March meeting. That expectation evaporated after oil prices surged more than 50% this month, driven by the Iran conflict and Strait of Hormuz disruptions. Vice president Alberto Naudon called the war “inflationary in the short term.”
Goldman Sachs scrapped its first-half rate cut forecast entirely. Alberto Ramos, the bank’s chief Latin America economist, said a cut is “not prudent at this moment” and that it will be “very difficult” for the central bank to deliver the easing it had signaled. One-year inflation expectations spiked 138 basis points in March to 3.9%, well above the 3% target.
MEPCO Under Fiscal Siege
Chile’s fuel price stabilization mechanism, known as MEPCO, absorbs oil price swings by adjusting fuel taxes counter-cyclically. But the mechanism is now costing the government up to $200 million per week, and the Kast administration warned it may not have the fiscal space to sustain it.
If MEPCO collapses, economists estimate gasoline could jump by CLP$300–350 per liter overnight, adding roughly 0.9 percentage points to monthly inflation split across March and April. The government has already extended the MEPCO calculation window from three to four weeks to slow the price pass-through.
Critically, kerosene — widely used for heating in low-income Chilean households — is not covered by the mechanism at all. Transport unions have demanded certainty from the Kast government on whether MEPCO will survive the current crisis intact.
Chile’s Unique Vulnerability
Chile stands out among Latin American economies for how little it cushions oil shocks. Brazil and Mexico offer direct fuel subsidies, and Colombia adjusts its stabilization mechanism at the government’s discretion. Chile’s MEPCO only smooths price fluctuations — it does not absorb them. When the buffer runs out, consumers bear the full cost. Brazil cut fuel taxes earlier this month to cushion the blow directly.
Barclays projects that if oil holds near $100 per barrel, Chile’s fiscal deficit will widen to 2.3% of GDP from 1.8% before the war. The bank also cut its 2026 growth forecast by half a percentage point to 2.2% — far below President Kast’s stated ambition of reaching 4% annual growth by 2030.
Scar Tissue From the Shock
In January, the central bank’s minutes indicated that the benchmark rate should decline to 4.25% — the midpoint of its estimated neutral range. That guidance now reads like a relic from a different era. Goldman raised its year-end inflation forecast by 70 basis points to 3.5% and cut its growth projection to 2.3%.
Even if the geopolitical crisis resolves quickly, the damage to Chile’s monetary timeline and fiscal position is already done. As Ramos put it, there will be “scar tissue” from this shock — and the central bank’s path back to easing just became considerably longer and more uncertain.