Chile: Central Bank keeps rate at 3.50% in August and adopts neutral tone on future policy decisions
August 11, 2016
At its meeting on 11 August, the Central Bank of Chile (BCC) kept the policy rate unchanged at 3.50%, where it has remained since the Bank’s December rate hike of 25 basis points. The decision to keep the policy rate at its current level came against a backdrop of inflation receding to the Central Bank’s target range and weak economic data in Q2.
Discussing the global economy, the BCC stated that monetary and financial conditions remained loose and that global growth prospects were stable overall. It pointed out that the risk premiums of emerging economies had fallen while their currencies had appreciated on the back of rising demand for risky assets. The Chilean peso was no exception and had also appreciated. The BCC also pointed out that most commodities had recorded a modest decline in prices recently.
Regarding the Chilean economy, the BCC noted that inflation had returned within its target range in July, even though it was surprisingly elevated. The Bank still expects inflation to converge to its 3.0% target in the next two years. Meanwhile, economic indicators point to weakness in Q2: business and consumer sentiment remained depressed and the labor market continued to worsen.
While the Bank reiterated that its monetary policy will remain focused on bringing inflation down to its target, the language from the accompanying statement signaled that the BCC was replacing the tightening bias that had prevailed at previous meetings with a more neutral monetary policy stance. The next monetary policy meeting is scheduled for 15 September.
Mario Castro, Research Analyst at Nomura, attributed the BCCH’s change to a neutral monetary policy stance to two main factors:
“We believe there were two factors behind the change in tone from BCCh. The first and most important was the BCCh board’s confidence that inflation will continue to converge to within the target band according to plan, benefitting from the CLP strength over the past few months. The second is the country’s weak economic performance, which is resulting in a slight deterioration of the labor market.”