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Chile Monetary Policy September 2019

Chile: Central Bank slashes key rate to over nine-year low in September

At its 3 September monetary policy meeting, the board of the Central Bank of Chile (BCCh) unanimously decided to cut the key benchmark rate to 2.00% from 2.50% where it had sat since June. The move, which was in line with analysts’ expectations, marked the second rate cut this year and brought the key rate down to its lowest level since August 2010.

Contained inflation, weakening economic activity and more accommodative stances taken by global central banks were all behind September’s cut. Growth faltered in the second quarter, as the world’s top copper producer felt the pinch of cooling global demand and prices for the red metal amid the escalating trade dispute between China and the U.S. On top of that, softer private consumption dynamics drove a slowdown in the domestic economy in Q2.

With regards to price pressures, inflation has hovered near the lower bound of the Central Bank’s 2.0% to 4.0% target range in recent months, partly due to subdued services price inflation. The economy’s weak second-quarter performance, which reflected feeble consumer demand, pointed to a longer-than-expected convergence of inflation to its target, prompting the Bank to implement a 50-basis-point rate cut.

Looking ahead, policymakers reiterated the Bank’s commitment to a flexible monetary policy stance ahead, in order to reach the 3.0% inflation target in a two-year horizon. As such, further stimulus is likely, provided growth remains lackluster and inflationary risks stay at bay. This viewpoint is summarized by Lorena Palomeque and Daniel Velandia, economists at Credicorp Capital, who noted:

“This decision was in line with most expectations including ours. In fact, the market rates have already incorporated such a move, as the Swap Curve priced-in more than 80 bps of cuts for the next twelve months. Considering the explicit dovish bias of the Board, this scenario should not be discarded.”

The next monetary policy meeting is scheduled for 23 October.

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