Chile: Central Bank holds rates steady in March
At its monetary policy meeting ending on 20 March, the board of the Central Bank of Chile (BCC) unanimously opted to leave the policy rate unchanged at 2.50% for the ninth consecutive meeting. The decision was in line with market expectations. Consequently, the Bank maintained its loose monetary stance, with the policy rate in Chile currently the lowest of any country in Latin America.
The Bank’s decision came as both headline and underlying inflation dipped in February, dampened by the appreciation of the peso since December. Headline inflation was at the Bank’s 2.0% lower bound, while underlying inflation was somewhat lower. However, medium-term inflation expectations remain well-anchored, according to the BCC’s March survey. On the demand side, the economy performed markedly better than expected in the final quarter of last year, and it has started the year on a robust footing. This should help reduce economic slack and gradually generate inflationary pressures. However, with inflation currently so low, and the impact of the stronger peso likely to continue dampening prices in the coming months, the Bank felt it was premature to begin raising rates.
In its communiqué, the BCC judged that the risk of inflation failing to return to the 3.0% target over the medium term had fallen due to strong economic activity. However, it also acknowledged that price pressures would be mild over the next several months due to the stronger peso. The BCC is therefore likely to stay put for now, before gradually raising rates as price pressures increase.