Chile: Central Bank cuts rates again in April
May 8, 2017
At its 13 April policy meeting, the Central Bank of Chile (BCC) decided to reduce the policy rate by 25 basis points, from 3.00% to 2.75%, marking the second consecutive monthly rate cut. The move surprised markets, who had expected the Bank to leave the rate unchanged, and marks a continuation of the easing cycle which began in January this year.
The move comes after the economy underwent a rough patch in Q1, with a prolonged strike at the Escondida copper mine reducing exports and taking a significant chunk out of economic activity in February and March. In addition, business and consumer confidence indicators remain entrenched in negative territory, while the labor market has recently shown signs of weakness, with unemployment rising since the start of the year, which could have a knock-on effect on consumption. The rate cut, combined with additional loosening earlier this year, should help prop up domestic demand and investment, which has been subdued in the last few quarters. On the price side of equation, inflation has dug itself in below the Central Bank 3.0% target, where it has been since the back end of 2016, giving the Bank the room to soften its stance without stoking price pressures.
The Bank’s tone once more hinted at a possible further loosening of monetary conditions going forward if growth remains lackluster, although this suggestion was less concrete than in previous meetings. Indeed, the Chilean economy is set to remain weak this year, hobbled by continuing pessimistic sentiment and a mining sector which is far less dynamic than it was a few years ago, which could set the stage for a further rate trim depending on the evolution of prices.
Author: Oliver Reynolds, Economist