Chile: Central Bank trims rates in March
April 1, 2017
At its 16 March policy meeting, the Central Bank of Chile (BCC) decided to reduce the policy rate by 25 basis points, from 3.25% to 3.00%, matching markets’ expectations. The decision came after a same-sized rate reduction in January this year.
The move comes as recently released data revealed the economy expanded at a measly pace last year and lost steam in Q4, beset by depressed consumer and business confidence and low copper prices. Economic activity in the first quarter of this year will also be negatively affected by protracted strike action at the Escondida mine, putting a significant dent in copper exports. The Bank’s rate cut will help prop up flagging domestic demand and boost investment, which has been particularly subdued in recent quarters. On the price side of the equation, inflation has seen a sustained fall over the last 12 months, and now sits below the Bank’s central 3.0% target, providing the BCC with more room to loosen monetary policy.
The Bank struck a dovish tone in its communique, positing that recent economic developments are likely to put more downward pressure on inflation, requiring a greater monetary impulse going forward. Indeed, the Chilean economy is set to remain weak this year, hobbled by continuing pessimistic sentiment and a mining sector which is far less dynamic than it was a few years ago, likely setting the stage for a further rate trim.
Author: Oliver Reynolds, Economist