Chile Maintains Key Rate as Core CPI Proves Hard to Predict

Updated on
  • Policy makers left borrowing costs at 2.5 percent as forecast
  • Bank has cut key rate four times in 2017, reducing it 100 bps

Chile’s central bank kept borrowing costs on hold after the core inflation rate jumped, then slumped and then rose again, leaving economists and policy makers divided over the outlook for rate cuts.

Policy makers, led by bank President Mario Marcel, held the key rate at 2.5 percent Thursday, as forecast by 19 of 20 economists surveyed by Bloomberg. One analyst predicted a quarter-point reduction.

The central bank signaled in May that the rate cutting cycle had come to an end after reducing borrowing costs four times this year to the lowest level in Latin America along with Peru. Then core inflation tumbled below the target range and traders and economists began to bet on one more reduction, only to rein in those forecasts after price-growth accelerated again in July. The bank maintained its neutral bias today as it takes a data dependent stance.

"The central bank is waiting to see the September data on activity and inflation," said Luis Felipe Alarcon, an economist at Euroamerica. "We think that there could be a rate cut in September."

Consumer prices rose 1.7 percent in July from the year earlier, under the bank’s 2 percent to 4 percent target range. Core inflation, which excludes energy and food costs, accelerated to 2 percent from 1.8 percent the month before.
“Once again, the biggest novelties in the past month have been with respect to inflation,” the central bank’s research department said in a report released Wednesday. “As a whole, inflation has developed below expectations, though that is almost totally due to changes in the most volatile prices.”

Split Decision

The central bank was split over last month’s decision to hold the benchmark rate at 2.5 percent, with policy maker Pablo Garcia backing a quarter-point cut after traders saw inflation coming in below target over the next two years. We won’t know if Garcia voted again for a cut today until the minutes are released in two weeks.

According to swaps trading, investors expect the key rate to average 2.29 percent over the next six months, signaling one quarter-point cut.

The majority of policy makers still expect inflation to pick up next year as economic growth accelerates. After economic expansion stalled in the first quarter of the year, analysts are forecasting that gross domestic product grew 1 percent in the following three months.

"Durable goods consumption and imports of capital goods continue to grow at high rates, while investment in construction and other buildings shows sustained weakness," the bank’s research department said yesterday.

— With assistance by Rafael Gayol, and Laura Millan Lombrana

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