Chile Leaves Key Rate Unchanged as Sluggish Growth Drags On

  • Benchmark kept unchanged at 3.5% for sixth straight month
  • Inflation has remained above target for most of past two years

Chile’s central bank left borrowing costs unchanged as the economy endures a third year of sluggish economic growth, while inflation remains above target.

Policy makers, led by central bank President Rodrigo Vergara, kept the key interest rate at 3.5 percent for a sixth month, as forecast by all 22 economists surveyed by Bloomberg. The bank reiterated that rates may need to rise to ensure inflation slows in line with the target.

The central bank reduced the top end of its 2016 growth forecast earlier this month, with Vergara saying expansion would remain below potential for a few more quarters. That weakness is easing pressure on consumer prices and leading economists to reduce their inflation forecasts. After raising rates twice at the end of last year, further rate increases now hinge on monetary policy in the U.S., said Felipe Alarcon, an economist at Euroamerica in Santiago.

"By keeping a tightening bias they make sure they are covered if the Fed does something or if the exchange rate becomes too volatile," Alarcon said. "If they change the bias to neutral, they risk having to change it back."

Still, the bank added some cautionary language to its tightening bias, saying a “significant deviation of inflation’s convergence may change” the pace of any interest rate changes.

"They maintain the right to do nothing because if inflation decelerates, they could keep the rate unchanged for a long time,” Alarcon said.

Chile’s inflation rate was unchanged at 4.2 percent in May after slowing in each of the previous three months. It has remained above the 2 percent to 4 percent target range for most of the past two years. Economists reduced their forecasts for inflation in 11 months to 3.2 percent in May from 3.5 percent at the end of last year.

As inflation eases, economic growth remains in the doldrums. The central bank expects the economy to expand 1.25 percent to 2 percent this year, down from its previous estimate of 1.25 percent to 2.25 percent. The Imacec index, a proxy for gross domestic product, rose 0.74 percent in April from the year earlier, the third slowest pace in six years.

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