Chile: Central Bank holds fire in June following an active start to the year
July 4, 2017
At its 15 June monetary policy meeting, the Central Bank of Chile (BCC) decided to take a breather and leave the policy rate at 2.50%, following three consecutive monthly rate cuts. The move was strongly hinted at in last month’s monetary policy statement and matched market expectations. As a result, 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, which is the lowest in Latin America.
The Bank’s decision comes amid a drizzly economic panorama, as the economy slowed to a virtual halt in Q1 on the back of a contraction in the mining sector. Although indicators for Q2 point to an uptick, growth will remain modest, due in part to a hangover from the mining strike. In addition, consumers and firms remain pessimistic and the labor market has slackened. By maintaining its expansionary monetary policy, the BCC should help prop up growth and breathe life into fixed investment, which has contracted for the last three quarters. Low interest rates should also counter the impact of tighter fiscal policy this year, as the government looks to constrain spending increases in order to keep a lid on the budget deficit. On the price side of the equation, inflation seems to have bedded down below the Central Bank’s 3.0% target, thanks to a stable currency and limited demand-pull pressures, as the economy is operating substantially below potential. Keeping interest rates low should help ensure that inflation doesn’t drop too far below target.
The communique offered little forward guidance, with the Bank reiterating its neutral stance adopted last month regarding future changes to the policy rate. The BCC highlighted that the forecasts announced in June’s Monetary Policy Report (IPOM) were still valid, with inflation expected to drift down towards 2.0% later this year before picking up in 2018. FocusEconomics panelists expect slightly higher inflation for 2017, although it is still forecast to remain below the Central Bank’s 3.0% target. In either case, the Bank is unlikely to face pressures on the price side to raise interest rates in the months ahead, and with growth set to remain fairly meager the BCC is unlikely to significantly change the policy rate in either direction for the time being. In 2018, a modest tightening cycle should begin as the economy regains its footing.
Author: Oliver Reynolds, Economist