Chile's Vergara Vows to Retain Stimulus Even as Rates Rise

  • Central bank has brought forward start of monetary tightening
  • Bank president Vergara commented in interview in Santiago

Faster-than-expected inflation spells an end to Chile’s “ultra expansive” monetary policy in the next few months -- not the end of all monetary stimulus, central bank President Rodrigo Vergara said.

The bank’s estimate of three quarter-point increases over the next year from 3 percent still holds, Vergara said in an interview Friday. The central banker damped recent market expectations for as many as four rate increases in the next 12 months and six in the next two years.

“We haven’t changed the intensity of the reduction in monetary stimulus, only its timing,” Vergara said. “Monetary policy will continue to be expansive” with the benchmark rate remaining below the neutral level of between 4.5 percent and 5 percent.

Policy makers voted 3-1 to hold rates last month, with Joaquin Vial backing a quarter-point increase after a slump in the peso kept inflation above the target range for a 17th month. Vergara and the others voted against a hike to “avoid validating expectations for increases beyond what we had expressed,” he said.

The change in the timeline for rate increases was “marginal, very minor,” he said. The bank will start to tighten monetary policy “soon,” and not around the end of the year as previously stated.

The central bank wants to keep monetary stimulus as economic growth remains subdued. Vergara reiterated the forecast for growth of 2.5 percent to 3.5 percent next year, with a “bias on the downside.”

The peso, which has weakened 13 percent against the dollar in the past 12 months, hasn’t provided as much as stimulus to the economy as forecast, Vergara said. The slump in other Latin American currencies and the weak regional economy means the peso has only boosted sales for some farmers and for companies that compete with U.S. imports.

At the same time, prices are rising faster than forecast as the weaker peso pushes up import costs. Inflation accelerated to 5 percent in August from 4.6 percent the month before, above the 2 percent to 4 percent target range for a 17th month.

“Inflation of 5 percent is obviously transitory,” Vergara said. “Inflation expectations haven’t become de-anchored, but we need to act with monetary policy to keep expectations at 3 percent.”

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