Chile Central Bank Leaves Rate Unchanged as Inflation Falls

  • Policy makers left the key rate at 3.5% for the tenth month
  • Inflation slowing faster than expected, central banker said

Chile’s central bank kept borrowing costs unchanged in October for a 10th straight month after inflation slowed to within the target range amid tepid economic growth.

Policy makers, led by bank President Rodrigo Vergara, left the key rate at 3.5 percent Tuesday, as forecast by all 21 analysts surveyed by Bloomberg. Economists are beginning to forecast that rates will start to fall as early as year end.

"The central bank is not under pressure because the lower inflation has not changed long-term market expectations," said Nathan Pincheira, an economist at Banchile. "The central bank still has time to prepare the path toward a change of bias and eventually a rate cut."

A drop in the inflation rate in September was an “important surprise,” Vergara said last week, adding that the bank would probably review its inflation forecast at the end of the year. Still, he indicated that policy makers would need evidence that sluggish economic growth and not just a rebound in the peso was pushing inflation lower before they could start to cut interest rates.

"Obviously, if inflation lowered for reasons other than the exchange rate, we would review monetary policy," Vergara told a conference in Santiago. "Inflation coming back to the target faster than we had forecast will probably result in a review of the inflation forecast at the end of the year."

Two-year swap rates briefly fell to an 18-month low last week of 3.18 percent, indicating that the market is pricing in a rate cut in March, followed by another in July.

The bank will closely monitor inflation after prices rose 3.1 percent in September from the year earlier, below the 3.4 percent that analysts had forecast, Vergara said. Policy makers target inflation of 2 percent to 4 percent.

"We are not expecting an inflation rebound in October," said Pincheira. "It is quite possible that inflation slows below the central bank’s 3 percent target in July, and this will bring up the question of how much space there is for a monetary policy move."

The unexpected drop in inflation came in the same month that the central bank estimated price-growth would end the year at 3.5 percent, before slowing to 3.1 percent in December 2017. Inflation fell back within the target range in July, triggering the first talk of a rate cut before the end of the year.

"We take our decisions based on trends, not one-time figures," Vergara said. "But the September inflation number was an important surprise and we will monitor it going forward."

— With assistance by Rafael Gayol, and Sebastian Boyd

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