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Chile Monetary Policy July 2018

Chile: Central Bank leaves policy rate unchanged in July, but suggests a tightening cycle is nearing

At its monetary policy meeting ending on 24 July, 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 over one year. The decision came in line with market expectations. As a result, the monetary policy in Chile remains among the most accommodative in Latin America.

The Bank’s decision was primarily due to well-anchored inflation expectations. In June, inflation came in at 2.5% (May: 2.0%), moving within the Central Bank’s 2.0%–4.0% target range. Meanwhile, core inflation rose to 1.9% in June (May: 1.7%). Despite increasing inflationary pressures from the depreciating peso and higher oil prices, the Bank maintained its projection of inflation hovering around 3.0% for both the one- and two-year horizon.

The tone of the communiqué was notably more hawkish this month compared to last. The Bank noted that the policy rate “will be returned to its neutral level during the next quarters”, replacing the previous statement that monetary policy will remain accommodative in the short term. Furthermore, the Bank added that the short-term outlook for inflation was revised up, chiefly due to the weaker peso. The peso has recently depreciated notably as policy normalization in advanced economies, especially the U.S., has led to a stronger dollar and motivated investors to unwind their positions in emerging economies. Moreover, the effects of escalating trade tensions are reverberating through financial markets and curtailing investors’ appetite for risk. These developments likely prompted the BCC to shift to a more hawkish stance this month. Accordingly, nearly all of our panelists have a rate hike penciled in for either the third or the fourth quarter of this year.

Chile Interest Rate Forecast

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