Chile Interest Rate

Central Bank of Chile holds rates steady in July

Interest rates unchanged for fifth straight meeting: On 28 July, the Central Bank of Chile left its policy rate at 4.50% for a fifth consecutive meeting. The decision was unanimous and had been penciled in by markets. Accordingly, rates remained at their lowest level since January 2022.

Weak economic activity and higher-than-expected inflation drive hold: The Bank opted not to cut as inflation came in higher than anticipated in June, remaining above its 3.0% target for a third straight month. Furthermore, higher oil prices and the effect on Chile’s currency of tighter U.S. financial conditions continued to pose upside inflation risks. At the same time, a hike wasn’t warranted due to weaker-than-expected economic activity, slowing investment and consumption plus a softer labor market in May. Along with elevated global and domestic economic uncertainty, these factors led the Board to resort to a cautious approach.

Most panelists see rates on hold through year-end: The Board reiterated that the policy outlook remains conditional on incoming data. A majority of our panelists expect the Bank to stand pat through year-end, as the Board seeks to balance above-target inflation and heightened external economic risks against a slowing domestic economy. Upside risks to inflation stem from higher oil prices, a weaker peso and the threat of higher core inflation. On the flip side, downside risks to inflation include weaker-than-expected GDP growth, softer consumption and investment plus further labor market deterioration. The Bank will reconvene on 8 September.

Panelist insight: EIU analysts commented on the risks to the outlook: “A rise in core inflation and inflation expectations above the 3% target may prompt the BCCh [the Central Bank of Chile] to tighten policy. There is a low risk that the war ends more quickly than we expect and oil prices fall sharply, which we believe would prompt the BCCh to cut the policy rate to support economic growth. Another risk to our monetary policy forecast would be durable supply-chain disruptions caused by a likely super El Niño weather system, which would bring heavy rains and could cause flooding.”

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