Chile’s central bank kept its monetary policy rate at 2.50 percent and repeated its guidance from last month that its board is paying special attention to the risk of low inflation as this “could require adjusting the policy rate.”
The Central Bank of Chile, which has cut its rate four times this year by a total of 100 basis points, added that it expects inflation to “remain low in the short term,” which could delay the convergence of inflation to its target of 3.0 percent, plus/minus 1 percentage point.
Last month the central bank’s board was confronted by a decline in September inflation to 1.5 percent, with the result that financial markets priced in rate cuts.
However, inflation then rose to 1.9 percent in October, “partly undoing the negative surprise of September,” shifting those expectations toward no policy easing, according to the central bank.
After a quarter-century of strong economic growth, Chile’s economy has stagnated in the last four years and inflation remains below the central bank’s target, leading to dissatisfaction with a sluggish economy, the central bank wrote in its background paper to today’s board meeting.
This has led to popular support for Presidential candidate Sebastian Pinera, president of Chile from 2010 to 2014, with the prospect of business-friendly policies boosting Chilean stocks. The presidential election is scheduled for Sunday, Nov. 19.
However, the central bank said it expects economic growth to rebound in coming years, with growth expected to accelerate to 2.6 percent in 2018, up from 1.6 percent in 2016.
In its September monetary policy report the central bank narrowed its 2017 growth forecast to 1.25-1.75 percent from 1.0-1.75 percent
In the second quarter of this year Chile’s Gross Domestic Product grew by only 0.9 percent, up from 0.1 percent in the first quarter, with third quarter data showing activity and demand in line with forecasts and investment still weak, affected by construction.
Chile’s peso has been appreciating steadily since January 2016 and was trading at 631.8 to the U.S. dollar today, almost 6 percent higher since the start of this year.
The Central Bank of Chile issued the following statement:
“In its monthly monetary policy meeting, the Board of the Central Bank of Chile decided to keep the monetary policy interest rate at 2.5%.
On the external front, third-quarter activity figures are consistent with a more dynamic scenario. Global financial conditions show no major changes. The oil price increased in recent weeks, while the copper price declined slightly, but it is still above expectations.
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At home, October’s CPI inflation of 0.6% exceeded the forecast, partly undoing the negative surprise of September, and placing annual inflation at 1.9%. Inflation expectations at short terms remain low, and medium-term expectations have remained constant. Third-quarter data at hand show the evolution of activity and demand in line with the latest Monetary Policy Report’s baseline scenario. Private consumption has performed in line with the labor market’s evolution and with not-so-pessimistic expectations. Investment is still weak, affected by construction activity.
Activity figures made available after the September Report are consistent with the baseline scenario and the monetary impulse depicted therein. However, inflation will remain low in the short term. This could delay its convergence to the target within the two-year horizon. The Board will pay special attention to this risk—already identified in the Report—as it could require adjusting the policy rate. At the same time, the Board reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the two-year horizon.”