Chile Inflation Slowed in July; Tightening Bias Seen Ending

Updated on
  • Inflation had been above target for most of the past two years
  • Economists expect central bank to remove tightening bias soon

Chile’s inflation rate fell to the top end of the central bank’s target range in July for the first time this year, adding to speculation the central bank will remove its tightening bias as economic growth weakens.

Prices increased 4.0 percent from the year earlier, compared with 4.2 percent the month before, Chile’s National Statistics Institute reported Monday. The median estimate of 16 economists surveyed by Bloomberg was for inflation of 3.9 percent. Prices gained 0.2 percent in the month.

Policy makers left the key interest rate unchanged for a seventh consecutive month in July, while repeating a warning that they may need to raise borrowing costs to ensure inflation slows in line with the 2 percent to 4 percent target range. While prices rose more than forecast in July, the tightening bias is likely to be removed in August’s monetary policy meeting as internal demand remains weak and the peso rallies against the dollar, said Antonio Moncado, an economist at Banco de Credito e Inversiones.

"The central bank should still modify the bias because prices are slowing down and a neutral bias is more coherent than a tightening one,” Moncado said after the inflation report was released.

Economic activity gained 0.8 percent in June from the year earlier, the third consecutive month of growth below 2 percent, according to the central bank’s Imacec index, a proxy for gross domestic product. Retail sales were also weak, increasing 1.1 percent, below the 2.7 percent forecast in a Bloomberg survey of ten economists.

In the minutes of its July 14 meeting, one banker said that “the evidence meant the option of reducing rates has more weight relative to the option of increasing them” as long as current economic tendencies led to inflation slowing more than forecast.

Inflation will slow to 3.5 percent at the end of this year and to the bank’s target of 3 percent at the end of 2017, Moncado forecast.

"There is an intense debate among central bankers right now," Moncado said. "In the August meeting we should see some change that makes central bank policy more coherent."