Chile: Central Bank holds fire in August
September 4, 2017
At its 17 August monetary policy meeting, the Central Bank of Chile (BCC) kept its monetary stance on hold for the third consecutive month, opting to leave the policy unchanged rate at 2.50%. As was the case in July, four committee members voted in favor of this decision, while one member voted for a rate cut to 2.25%. Consequently, the Bank maintains its loose monetary stance, which has seen the policy rate fall from 3.50% at the end of 2016 to its current level, the lowest of any country in Latin America.
The Bank’s decision came after inflation remained at 1.7% in July, thus staying below the 2.0%–4.0% tolerance range for the second consecutive month and marking the joint-lowest level in several years. The recent appreciation of the peso against the dollar, if maintained, could add further downward pressure to inflation going forward. At same time, economic activity remained fairly tepid in Q2 despite a slight uptick compared to Q1, with the construction sector looking particularly weak. This confluence of factors led the Bank to once again evaluate the merits of a rate cut to 2.25% in order to bring inflation back to target and prop up economy.
However, the BCC’s strong credibility in the market means there is little risk of inflation expectations becoming de-anchored; according to the monthly Economic Expectations Survey (EEE), the market’s medium-term inflation expectations still sit at the Bank’s 3.0% target. In addition, the BCC highlighted that despite disappointing headline inflation figures in recent months, underlying inflation had performed as expected, while weak economic growth in Q2 was due in part to temporary supply shocks and unfavorable base effects. As a result, the Bank opted to stay put, in order to allow time for previous monetary easing to feed through to prices.
The communiqué offered little forward guidance, although the Bank reiterated its neutral stance regarding changes to the policy rate going forward. FocusEconomics panelists expect inflation to continue near the Bank’s 2.0% lower bound over the next few months, but then to converge to the Central Bank’s 3.0% target towards the end of next year. Faced with this scenario, and following substantial easing in recent months, the Bank is unlikely to significantly alter interest rates for the time being, although the policy needle points towards a possible rate cut in the short-term. In 2018, a modest tightening cycle should begin as the economy regains its footing and inflation picks up.
Author: Oliver Reynolds, Economist