Chile’s central bank raised its 2023 inflation forecasts in a closely-watched report published a day after the institution held its key interest rate steady and signaled that borrowing costs won’t be coming down until price increases are under control. Swap rates jumped.
(Bloomberg) — Chile’s central bank raised its 2023 inflation forecasts in a closely-watched report published a day after the institution held its key interest rate steady and signaled that borrowing costs won’t be coming down until price increases are under control. Swap rates jumped.
Annual inflation will slow to 4.6% in December, above the 3.6% prior estimate, according to the bank’s quarterly monetary policy report published Wednesday. The institution sees gross domestic product ending this year between 0.5% down and 0.5% up, compared to the previous forecast of a drop of between 0.75% and 1.75%.
Late Tuesday, policymakers led by Rosanna Costa kept borrowing costs unchanged at 11.25%, 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. Two-year swap rates, an indication of future interest rates, leaped 22 basis points to 7.77% on Wednesday.
“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.
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“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.
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 to include details from quarterly monetary policy report)
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