Chile Keeps Key Rate Unchanged at After Inflation Slowed

  • Borrowing costs kept at 3.5% for fourth consecutive month
  • Lower than expected price rises ease pressure on bank to act

Chile kept borrowing costs unchanged for a fourth consecutive month as inflation slowed more than analysts forecast after remaining above the target range for most of the past two years.

Central bankers, led by bank President Rodrigo Vergara, kept the key rate at 3.5 percent Tuesday, as forecast by all 18 economists surveyed by Bloomberg. In their statement detailing their decision, policy makers appeared to have shifted their focus to the pace of the economy’s expansion.

"This statement’s bias is less hawkish than the last one and it shows that the central bank is internalizing the forecasts of slower economic growth," said BBVA Chile chief economist, Jorge Selaive. "We think that the central bank will keep this bias for a few months, at least until June, when the bias could go to neutral."

Consumer prices rose 4.5 percent in March from the year earlier, compared with the 4.6 percent median estimate of analysts surveyed by Bloomberg and down from 4.7 percent in February. The bank targets inflation of 2 percent to 4 percent.

‘New Information’

Policy makers in Tuesday’s statement also indicated that future monetary policy would be data dependent.

“Ensuring that inflation converges with the target will require continuing with the normalization of monetary policy at a rhythm that depends on new information and its implications on the inflation outlook," the bank’s board said in their statement.

The decline in the inflation rate led two-year breakevens, a measure of the price increases being discounted by the swaps market, to fall 10 basis points to 2.9 percent on Friday. The one-year declined 17 basis points to 2.95 percent, the lowest level since October.

Pressure on prices has eased as Chile’s long-heralded economic recovery keeps getting pushed back. The central bank reduced its 2016 growth forecast to between 1.25 percent and 2.25 percent last month, from the previous estimate of 2 percent to 3 percent. 

Economic activity grew 0.5 percent from the year earlier in January and 2.8 percent in February. Also last week, Chile’s statistics agency reported that wages fell 0.2 percent in February from the month before, matching the biggest decline in six years.

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