Chile Holds Key Interest Rate and Warns of Increases to Come

  • Key rate kept at 3.25% after October's quarter-point increase
  • Bank has forecast one or two rate rises over next 10 months

Chile’s central bank paused after raising interest rates for the first time in four years last month, while reiterating its forecast for further increases to come as it looks to tame inflation.

Policy makers, led by bank President Rodrigo Vergara, left the benchmark interest rate at 3.25 percent Thursday, as forecast by 20 of 28 economists surveyed by Bloomberg. The other eight expected a quarter-point increase.

A slowdown in inflation to the top of the target range in October will provide only a temporary respite for policy makers, Vergara said last week, forecasting that price-growth would accelerate again in the next few months. Inflation will remain above the 2 percent to 4 percent target goal through to the middle of next year, prompting one or two more rate increases over the next 10 months, he said.

“There should be another increase toward the end of the first quarter,” said Antonio Moncado, an economist at Banco de Credito e Inversiones in Santiago. The international and domestic “context of instability has led the central bank to be a little more cautious for now about rates.”

Analysts surveyed by the central bank this week said inflation, currently at 4 percent, would return to the 3 percent goal within two years. Core inflation, which excludes food and energy costs, was 4.8 percent in October.

With inflation expectations anchored at the target, the central bank has vowed to retain monetary stimulus amid economic weakness, saying the key key rate won’t reach the neutral level of 4.5 percent to 5 percent any time soon.

“The future trajectory of the key rate envisages additional adjustments to ensure the convergence of inflation to the target,” the central bank said in a statement accompanying today’s decision. “The rhythm will depend on new information and its implications for inflation.”

There are tentative signs of an economic pick-up. Economic activity rose at the fastest pace in two years in September, fueled by an unexpected rise in manufacturing that helped lift industrial production for the third time this year. The Imacec index, a proxy for gross domestic product, rose 1.1 percent from the prior month, when it contracted 1 percent, the central bank said last week.

Chile’s rebound from the slowest growth in five years in 2014 has taken longer than forecast as investment stagnates and consumer spending remains weak.

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