Chile Inflation Rate Falls to Lowest in More Than Two Years

Updated on
  • Consumer prices rose 3.4 percent in August from year earlier
  • Central bank has removed tightening bias on monetary policy

Chile’s inflation rate fell to the lowest since February 2014 in August, dropping back within the target range in the same month that policy makers shifted their tightening bias back to neutral.

Prices rose 3.4 percent from the year earlier, compared with 4 percent in July, the central bank said on its website Thursday. That was in line with the median estimate of 17 analysts surveyed by Bloomberg. Prices were unchanged in the month.

Inflation had been outside the 2 percent to 4 percent target range for most of the past two years after a slump in the peso pushed up the cost of imports. The currency has pared its losses this year, enabling policy makers to hold the key rate unchanged at 3.5 percent in August for the eighth consecutive month and remove the tightening bias. Inflation is now below the benchmark interest rate for the first time in more than two years, fueling the incipient speculation of a rate cut by year end.

"Inflation should remain around the current level or even lower for the rest of the year," said Anibal Alarcon, an economist at BBVA Chile in Santiago. "We expect it will go below 3 percent next year, which means that there will be space for monetary stimulus from the point of view of inflation."

BBVA Chile is forecasting a quarter-point rate cut during the last three months of this year and a second reduction in 2017. The central bank’s quarterly monetary policy report released Wednesday said their economic growth forecasts assumed that interest rates would remain unchanged for the foreseeable future.

With inflation within the target range, the central bank’s concerns have turned to Chile’s slow growth. The economy contracted 0.4 percent in the second quarter from the previous three months.

"The main concern is the low growth that the Chilean economy keeps experiencing," central bank President Rodrigo Vergara said Wednesday. "It is something that we not only need to worry about, but that we need to take as a priority."

As growth slows, the labor market is weakening. The jobless rate rose to a five-year high in the three months through July, while wage growth fell to the lowest in almost six years in the same month. That will ease pressure on inflation.

(Updates with analyst comment in the fourth paragraph.)
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