Chile: Central Bank stays put in July, despite low inflation
July 28, 2017
At its 13 July monetary policy meeting, the Central Bank of Chile (BCC) remained on hold for the second consecutive month and opted to leave the policy rate at 2.50%. Four committee members voted in favor of this decision, while one member voted for a rate cut to 2.25%. As a result, the Bank maintains its loose monetary stance, which has seen the policy rate fall from 3.50% at the end of 2016 to its current level, the lowest in Latin America.
The Bank’s decision came after inflation tumbled outside the tolerance range in June, falling to the lowest level in several years. This led the BCC to evaluate the merits of further monetary stimulus in its communique, in order to ensure inflation returns to the target swiftly and guard against the possibility of weaker-than-expected growth going forward. However, June’s inflation figure was due in large part to lower prices for fruit and vegetables, an often volatile sub-category, with underlying inflation performing rather more strongly. In addition, the Central Bank’s Economic Expectations Survey (EEE) shows that there is little risk of expectations becoming de-anchored for the time being; the market’s medium-term inflation expectations still sit dead on the Central Bank’s 3.0% target. These factors persuaded the Bank that the overall inflation picture looking ahead was little changed, rendering a rate cut unnecessary for the moment. On the demand side, the economy looks to have recovered some vigor in Q2, with economic activity picking up and consumer confidence reaching its highest level in over two years in June. As a result, the Bank decided to give time for recent monetary easing to feed through to the economy, rather than reduce rates further.
The communique offered little forward guidance. The BCC highlighted that following June’s figure, inflation is likely to flirt with the Bank’s lower bound of 2.0% over the next few months, but should still converge to the central 3.0% target in the medium term. FocusEconomics panelists largely concur, and expect inflation to rise to the target by the end of next year. Faced with this scenario, and following substantial easing in recent months, the Bank is unlikely to alter interest rates significantly for the time being, although the policy needle has seemingly swung towards a possible rate cut in the short-term. In 2018, a modest tightening cycle should begin as the economy regains its footing.
Author: Oliver Reynolds, Economist