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Chile Monetary Policy October 2018

Chile: Central Bank hikes rates in October

At its monetary policy meeting on 18 October, the board of the Central Bank of Chile (BCC) unanimously voted to raise the policy rate by 25 basis points to 2.75%, from 2.50%—where it had been since April 2017. The rate hike was largely driven by rising inflationary pressures and came against the backdrop of sustained economic activity growth. Market expectations were split on the Bank’s decision to raise rates.

The Bank’s monetary tightening was driven mainly by heightened inflationary pressures, as rent and gasoline prices swelled. Inflation landed above the midpoint of the Bank’s target range for the first time in 24-months, while core inflation—which excludes volatile components such as food and energy—also jumped. Expectations of household inflation for the next two years currently lie at the midpoint of the Bank’s 2.0%–4.0% target band and also supported the Bank’s decision to tighten its monetary policy stance.

Joao Ribeiro, a research analyst at Nomura, expanded:

“The central bank has given itself a fair amount of leeway to conduct policy in the near term (from a still-expansionary level), particularly as the inflation outlook remains generally consistent with a convergence (of headline and core measures) to the 3.0% y-o-y target in coming quarters.”

Lastly, fluctuation of the domestic currency in recent weeks following the Fed’s decision in September to raise rates widened the interest rate differential. The Bank’s hike in response should combat capital outflows and a depreciation of the currency, which would stoke unwanted inflationary pressures.

In its communiqué, the Bank remained hawkish to ensure a smooth transition towards a neutral monetary policy while keeping inflation within the target range. Economic growth, although strong, may moderate in the near-term. Nevertheless, favorable copper prices will continue to support the Bank’s policy adjustment.

The next monetary policy meeting is scheduled for 4 December.

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