Chile: Central Bank trims rates again in May
June 5, 2017
At its 18 May monetary policy meeting, the Central Bank of Chile (BCC) decided to reduce the policy rate by 25 basis points, from 2.75% to 2.50%, marking the third consecutive monthly rate cut. The move surprised markets, who had expected the Bank to leave the rate unchanged, and marks a continuation of the easing cycle which began in January this year.
The Bank’s decision comes after recently released figures show the economy juddered to a virtual halt in the first quarter of the year on the back of a sharp fall in mining exports, largely due to a protracted labor dispute. In addition, consumers and firms remain pessimistic, while the labor market has slackened since the start of year, with unemployment rising. Faced with a more downbeat economic panorama, the BCC opted to continue its expansionary monetary policy, which has seen rates fall significantly in a short space of time from 3.50% at the end of 2016. The move should prop up domestic demand and breathe some life into fixed investment, which has contracted for the last three quarters. On the price side of the equation, inflation seems to have hunkered down below the Central Bank’s 3.0% target, thanks to a stable currency and limited demand-pull pressures, as the economy is operating substantially below potential. This gave the Bank more room to loosen its stance further without stoking inflation.
In contrast to previous meetings, during which the BCC explicitly hinted at a further monetary loosening going forward, in May the Bank offered no such forward guidance. With economic growth set to gradually pick up speed in the quarters ahead—despite remaining hobbled by weak construction investment and a less dynamic mining sector—and inflation gradually set to tick up towards the target by the end of the year, the Bank is unlikely to significantly change the policy rate in either direction for the time being. In 2018, a modest tightening cycle should begin as the economy regains its footing.
Author: Oliver Reynolds, Economist