Chile’s central bank held its benchmark interest rate steady for the third straight meeting and signaled that eventual borrowing cost reductions are further off as inflation takes longer to head to target.
(Bloomberg) — Chile’s central bank held its benchmark interest rate steady for the third straight meeting and signaled that eventual borrowing cost reductions are further off as inflation takes longer to head to target.
Policymakers led by Rosanna Costa kept borrowing costs unchanged at 11.25% late on Tuesday, as expected by all analysts in a Bloomberg survey. In a statement, board members wrote the economy is adjusting more slowly than expected to tighter monetary conditions and inflation has been more resistant.
“In this context, the Board considers that it will be necessary to keep the monetary policy rate at 11.25% until macroeconomic conditions indicate that the process of inflation convergence to the 3% target has been consolidated,” they wrote. “As described in the central scenario of the March Monetary Policy Report, this process will take longer than expected in December.”
Policymakers are keeping the key rate at the highest in more than two decades as core inflation remains under pressure. Moreover, analysts expect the economy to firm up in the first quarter after the smallest of gains in late 2022. Traders surveyed by the monetary authority see cost-of-living increases remaining above the 3% target through the next two years.
Read more: Irrepressible Consumer Puts Chile Linker Bonds Back in Spotlight
“We are pushing back our estimate on the first decline in rates from May to July,” said Sergio Godoy, chief economist at STF Capital. “This is based on the more hawkish tone of the statement, inflation’s slow decline and that the economy has shown more resilience than expected.”
Chile forms part of a growing list of central banks that are holding borrowing costs in a sign that rate hikes have peaked. This week, Australia paused its almost yearlong tightening cycle, while in late March, Brazil’s central bank kept the benchmark Selic unchanged for the fifth straight meeting.
Core Inflation
In their statement, board members wrote that cost-of-living increases remain elevated. “While total inflation has declined, core inflation has been fairly constant for several months. Moreover, it has accumulated a significant upward surprise in recent months,” they wrote.
Annual inflation stood at 11.9% in February. In an interview to El Mercurio published on Sunday, Finance Minister Mario Marcel said he sees inflation back in the single-digits by May and between 4% and 5% at year’s end.
Policymakers will present their latest forecasts for consumer prices and growth in their quarterly monetary policy report on Wednesday.
Regarding activity, central bankers wrote that adjustments in consumption levels became slower at the end of last year. They also cited pessimism among both households and businesses.
Chile’s economic activity fell more than expected in February on a drop in mining production, the central bank reported on Monday. Still, the prior month’s gain was revised roughly three times higher, to 1.6% from 0.5%.
In their statement, board members wrote that volatility and uncertainty in the global economy remain substantial. “The Board reaffirms its commitment to act with flexibility in case any of the internal or external risks materializes and macroeconomic conditions so require,” they wrote.
“The statement reinforces our outlook for rate cuts beginning in July,” said Sebastian Diaz, an economist at Pacifico Research in Santiago, who said he sees borrowing costs falling to 7.25% in December.
–With assistance from Rafael Gayol, Giovanna Serafim and Valentina Fuentes.
(Re-casts story, includes more details from statement in second and third paragraphs, economist comments starting in fifth paragraph)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.