Chile tempers easing, signals interest rate cuts
SANTIAGO: Chile’s central bank slowed the pace of interest rate cuts and left its options open for the size of future reductions, signalling caution in the face of inflation risks from stronger economic activity and a weaker peso.

Policymakers cut the interest rate by three-quarters of a percentage point to 6.5%, as expected by nearly all analysts in a Bloomberg survey.

In a statement, they wrote that borrowing costs will continue to fall and that the easing cycle will consider the evolution of the economy and its effects on inflation.

“Rising inflation figures at the beginning of the year and higher imported cost pressures emphasise the need to continue to closely monitor its evolution,” they wrote.

Policymakers are recalibrating the pace of easing as they guide inflation back to the 3% target amid a rebound in some sectors, including manufacturing and retail.

Chile’s economy picked up at the start of the year after barely growing in 2023 as restrictive rates and political uncertainty weighed on demand. Consumer prices also rose more than expected in January and February.

“A smaller rate cut and revised forward guidance on Tuesday showed Chilean policymakers are more cautious after inflation surprises early in 2024,” said Latin America economist Felipe Hernandez.

“We expect smaller cuts at the coming meetings. The less dovish outlook on Tuesday should provide some support for the peso.”

In their statement, policymakers wrote that recent data “showed a contrast between somewhat better-than-expected activity and weaker demand”.

While supply factors and services have helped drive overall growth, unemployment remains above historical averages, they wrote.

“The statement is more open-ended,” said Nathan Pincheira, chief economist at Fynsa in Santiago.

“There’s a dose of uncertainty due to a lack of conviction that recent data will become more permanent.”

Consumer prices jumped 0.6% in February, tripling the median estimate from economists in a Bloomberg survey. Annual inflation, as measured by the chained series, accelerated to 4.5%.

Central bankers attributed faster inflation at the start of 2024 to a weaker peso, global cost increases, and also the adjustment of some local prices.

The peso has tumbled the most among emerging market currencies this year, potentially stoking rises in import prices over the coming months.

Unlike before, central bankers refrained from indicating when borrowing costs would fall to a neutral level that neither stimulated nor restrained the economy.

“The rush to cut has ended,” Jorge Selaive, a chief economist at Scotiabank Chile, wrote on the social media platform X.

Both economists and traders surveyed by the central bank see annual inflation on target next year.

Central bankers also signalled vigilance on the international economy. In their statement, board members warned of risks to global inflation, including transportation, fuels and services.

Global financial markets expect the US Federal Reserve to delay the start of easing as policymakers in the world’s largest economy turn more cautious, Chilean central bankers wrote.

“The United States, whose inflation has been somewhat above what was expected in recent months, stands out, along with an economy that has remained resilient, supported by a strong labour market and robust private consumption,” they wrote.

In their prior rate-setting meeting in January, Chilean central bankers whet bets on aggressive easing by delivering a full percentage point cut and said one member wanted to mull a reduction of as much as 1.5 percentage points.

“In our view, the it reads more cautious than before, moderating the extreme dovishness seen in the January meeting,” Credicorp Capital analysts Daniel Velandia and Samuel Carrasco wrote in a note. — Bloomberg
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Chile’s central bank slowed the pace of interest rate cuts and left its options open for the size of future reductions, signalling caution in the face of inflation risks from stronger economic activity and a weaker peso.