Chile Central Bank Holds Key Rate, Removes Tightening Bias

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  • Benchmark rate has remained unchanged at 3.5% all this year
  • Economists expect rates to remain on hold for at least a year

Chile’s central bank left its key interest rate unchanged for the eighth consecutive month and removed its tightening bias as inflation fell within its target range and economists forecast the first economic contraction in six years.

Policy makers, led by bank President Rodrigo Vergara, kept the key rate at 3.5 percent on Thursday, as forecast by all 26 analysts surveyed by Bloomberg.

In a statement accompanying the decision, the central bank removed wording that referred to the potential normalization of rates to slow inflation, merely saying that it remained committed to a “flexible” monetary policy to achieve its goal of 3 percent. While recognizing that prices rose more than forecast in July, gaining 4 percent from the year earlier, policy makers also highlighted the return of inflation to the “tolerance range.”

"The question that is on the table now is whether the central bank is only changing to neutrality or if this is the first of a number of steps towards cutting rates," said Nathan Pincheira, an economist at Banchile Inversiones in Santiago. "We expect the bank to hold rates this year. We think a scenario where the bank cuts rates still needs time."

Economists surveyed by the central bank expect rates to remain unchanged for the year ahead as the economy endures its third year of sluggish economic growth and the unemployment rate begins to climb. They are split over a potential rate rise in the following 12 months.

Weakening Economy

Chile’s gross domestic product probably contracted 0.7 percent in the second quarter from the previous three months, the first decline since an earthquake devastated much of the center-south of the country in March 2010, according to three economists surveyed by Bloomberg. Unemployment rose to an almost five-year high of 6.8 percent in the same period.

"We have weak economic perspectives for this year and, together with a stable exchange rate, everything indicates that inflation will slow down and converge on the bank’s 3 percent target," said Antonio Moncado, an economist at Banco de Credito e Inversiones Chile.

One central banker said in the minutes of last month’s meeting that the option of reducing rates “has more weight” than the option of increasing them as long as current economic tendencies led to inflation slowing more than forecast. He added that may be a premature conclusion for now.

The central bank has forecast that inflation will slow to 3.6 percent by year end and to 3 percent by the end of 2017.