Chile: Central Bank keeps rates unchanged in September
October 3, 2017
At its 14 September monetary policy meeting, the Central Bank of Chile (BCC) kept its monetary stance on hold for the fourth consecutive month, opting to leave the policy rate unchanged at 2.50%. The decision was unanimous, unlike in the previous month, when one committee member had voted for a rate cut to 2.25%. 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 remaining below the Bank’s 2.0% lower bound for the third consecutive month in August. In addition, the recent appreciation of the peso will likely dampen inflationary pressures further in the coming months. However, the Central Bank made it clear that underlying inflation had performed in line with expectations, and that the market’s medium-term inflation expectations remain firmly anchored at 3.0%. In addition, the economy has been sending some positive signals in recent months, with economic activity soundly beating market expectations in July and consumer confidence rising uninterruptedly since February. In addition, the rise in copper prices, if maintained, should provide a further boost to the economy. This could lead to greater inflation going forward. As a result of these factors—and to avoid overreacting to short-term fluctuations in inflation—the BCC decided to leave its policy rate unchanged.
In contrast to previous months, the communiqué offered stronger forward guidance, with the Bank suggesting that it would keep the policy rate roughly unchanged in the short term, before tightening its monetary stance in the medium term as slack in the economy is reduced and inflation gradually drifts up towards the Bank’s central target of 3.0%. The possibility of a rate cut, which had seemed increasingly likely due to low headline inflation, thus seems to have diminished for the time being.
Author: Oliver Reynolds, Economist