Chile: Central Bank leaves policy rate unchanged in May
May 3, 2018
At its monetary policy meeting ending on 3 May, the board of the Central Bank of Chile (BCC) unanimously voted to hold the policy rate stable at 2.50% for the tenth consecutive meeting, in line with market expectations. In turn, the monetary policy environment in Chile remains among the most accommodative in Latin America.
Driving the decision was lower headline inflation, which came in at 1.8% in March (February: 2.0%), below the lower bound of the Central Bank’s 2.0%–4.0% target. Meanwhile, core inflation was even lower in the month at 1.6%. Nevertheless, medium-term inflation expectations remained well-anchored around the middle of the Bank’s target range. On the demand side, economic activity picked up in the first quarter. A rebound in mining output, coupled with a recovering construction sector and favorable consumer and business sentiment, should eventually generate upward pressure on headline inflation. However, employment levels remain subdued, and nominal wage growth decelerated in recent months, both likely dampening inflationary pressures and making it difficult for the BCC to raise rates.
In its communiqué, the Bank stated that it expects inflation, especially the underlying component, to stay low throughout most of this year, signaling that failure to enter the target range within the forecast horizon remains plausible. With inflation falling to a six-month low, seemingly on the back of the significant appreciation of the peso against the dollar since last December, the probability of a rate hike in the coming months appears less likely. Nevertheless, the board sees inflation picking up pace next year as the effects from the appreciation of the peso and the current capacity gaps fade away. As a result, the BCC is likely to stay put in the short term, before gradually increasing the rates as inflationary pressures intensify.
Author: Almanas Stanapedis, Economist