Chile Unexpectedly Cuts Key Rate To 2.5%

Chile’s central bank lowered the benchmark interest rate by 25 bps to 2.50 percent in its May 18th, 2017 meeting following a 25 bps cut in its April 13th meeting. Market participants were expecting no change. The move leaves the interest standing at its lowest level since September of 2010. Policymakers mentioned that mining and construction activity contracted in the first quarter while inflation is expected to remain on target. Members of the board also underscored that further easing will depend on mid-term inflation expectations.

Inflation in Chile increased 2.7 percent year-on-year in April of 2017, at the same pace as in the previous two months and within the central bank’s target of 2.0-4.0 percent. Annual core inflation rose by 2.2 percent, at the same pace as in March and at the lowest since November of 2013. The central bank predicts year-end inflation of 2.7 percent in 2017.

While the rate cut surprised market expectations for the second straight meeting, in its March quarterly inflation report, the central bank lowered GDP estimates, while leaving unchanged inflation forecasts, suggesting that a more accommodative monetary stance may be expected this year, as confirmed by today’s monetary policy rate announcement. 

Statement by the Central Bank of Chile:

Internationally, despite a recent increase in volatility, financial conditions have remained favorable and incoming figures continue to lend support to a scenario of stronger growth in the developed world. Commodity prices again showed mixed fluctuations, with a drop in the copper price. Overall, important risks persist.

On the domestic front, annual inflation remained at 2.7% and expectations at the end of the projection horizon are near the target. The activity and demand outlook depicted in the first-quarter National Accounts were in line with the March Monetary Policy Report, showing the negative impact of mining and construction. Private consumption is stable, reflecting the performance of the labor market.

The Board reiterates its commitment to conduct monetary policy with flexibility so that projected inflation stands at 3% over the policy horizon. Any future changes in the monetary policy rate will depend on the implications of domestic and external macroeconomic conditions on the inflationary outlook.

Chile Unexpectedly Cuts Key Rate To 2.5%

Mario |
5/18/2017 10:34:06 PM