Chile: Central Bank keeps policy rate unchanged; signals upcoming rate hikes
September 15, 2015
The Central Bank of Chile (BCCH) decided to keep the policy rate unchanged at 3.00% at its meeting on 15 September. The decision was in line with market expectations and marked the tenth consecutive meeting in which the Bank has kept the policy rate unchanged. At the same time, the Bank signaled that it stands ready to hike the interest rate at any time in order to fight high inflation and bring it back to its 3.0% target, even though the Chilean economy has lost momentum in recent months.
Regarding the expected timing of the Central Bank’s next rate hike, Mario Castro, LatAm strategist at Nomura Securities, comments:
“The minutes maintained a hawkish tone and show that the BCCh is ready to hike the policy rate on the back of the inflationary pressure observed in the economy. […] Due to the BCCh’s increasing discomfort with inflation dynamics, we now think that the central bank will bring forward its planned rate hikes to Q4 2015, starting with a 25bp hike to 3.25% in the upcoming October policy meeting. We expect additional 25bp hikes in the November and December meetings, reaching a policy rate of 3.75% by the year end. In the absence of unforeseen inflationary pressures, we expect the policy rate to remain at that level throughout 2016.“
As for international developments, the Bank pointed out that global financial markets have been “highly volatile”, mainly owing to turmoil in China, uncertainty about the timing of an expected U.S. interest rate hike and a weaker economic outlook for Latin America, specifically Brazil. Commodity prices, particularly prices of oil and copper, also were volatile recently.
In the domestic arena, according to the Bank, August’s inflation surprised on the upside and jumped to 5.0%, mainly driven by increases in the more volatile components of the price index. Conversely, the less volatile core inflation was in line with the Bank’s forecast. The Bank pointed out that inflation expectations continued to rise and that it would monitor its development with “special attention”. At the same time, weak output and demand along with depressed confidence indicators paint a bleaker picture of the Chilean economy. The next monetary policy meeting is scheduled for 15 October.