Chile: Central Bank holds the key rate unchanged and sticks with hawkish guidance
September 4, 2018
At its monetary policy meeting ending on 4 September, the board of the Central Bank of Chile (BCC) unanimously voted to hold the policy rate steady at 2.50%, where it has been for the past 16 months. The “hold” came in light of a strong economic outturn in the second quarter and was broadly in line with market expectations.
The Bank’s decision was once again largely driven by well-anchored inflation expectations, although short-term expectations rose slightly in August. Meanwhile, inflation moved closer to the midpoint of the Bank’s 2.0%–4.0% target range in July, reaching 2.7% in the month, from 2.5% in June. In addition to strong domestic demand dynamics, external developments stoked inflationary pressures in recent weeks as the ongoing emerging-markets selloff, lower copper prices and a stronger U.S. dollar led to the depreciation of the peso. Core inflation, however, remained stable at 1.9% in July. As a result, notwithstanding stronger inflationary pressures from the depreciating peso and higher energy prices, the BCC maintained its projection of inflation staying near 3.0% for both the one- and two-year horizon.
In its communiqué, the Bank kept the hawkish guidance it introduced in July’s monetary policy meeting. The Bank stated that better-than-expected expansion in the second quarter has helped to accelerate the closing of the output gap amid buoyant private consumption and investment growth. Sturdier GDP growth signals that the headline inflation should converge to the target quicker than previously expected, which has allowed the Bank to confirm its intention of starting to gradually remove monetary stimulus in the coming months.
All in all, taking into account the Bank’s seemingly strong commitment to its hawkish guidance, most of our panelists expect a rate hike by the end of the year, either in the third or in the fourth quarter.
The next monetary policy meeting is scheduled for 17–18 October.
Author: Almanas Stanapedis, Economist