Chile: Central Bank holds rates steady in October
October 31, 2017
At its 19 October monetary policy meeting, the Central Bank of Chile (BCC) kept its monetary stance on hold for the fifth consecutive month, opting to leave the policy rate unchanged at 2.50%, in line with expectations. Consequently, the Bank maintained its loose monetary stance, which has seen the policy rate fall gradually from 3.50% at the end of 2016 to its current level, the lowest of any country in Latin America.
The decision came despite inflation dropping sharply to 1.5% in September, substantially below the Bank’s 2.0% lower bound, which took the BCC by surprise. In addition, although inflation expectations over a two-year horizon remained unchanged compared to the previous month, short-term expectations dropped sharply in October, which could influence price-setting decisions. However, underlying inflation was slightly stronger in September, and the economy is showing clear signs of strengthening; recent economic activity readings have been encouraging, and business and consumer confidence surged in September. As a result, the Bank felt that further monetary loosening at the current juncture was not warranted.
The Central Bank took a slightly more dovish stance this month in its communiqué, following September’s disappointing inflation figure. The BCC stated that a more expansive monetary policy could be necessary if it becomes clear that inflation is unlikely to return to target over the two-year forecast horizon. However, any rate cut is likely to be modest, and monetary tightening is expected to resume towards the end of next year as growth picks up.
Author: Oliver Reynolds, Economist