Bloomberg — Chile’s central bank is widely expected to deliver a second large cut to its key interest rate as policymakers reaffirm their view that inflation is slowing to target, despite near-term price pressures.
Nine of 16 economists surveyed by Bloomberg expect policymakers to lower the benchmark rate 75 basis points to 9.5% after markets close on Tuesday, while the other seven forecast a full percentage-point reduction. The board has signaled it may slow the pace of easing following July’s initial cut of 100 basis points.
Policymakers led by Rosanna Costa have put annual inflation on track to hit the 3% target within 24 months, after launching an aggressive monetary tightening cycle to curb prices that were rising last year at their fastest pace since 1992. Still, recent floods and weakness in the peso have posed additional challenges for the central bank.
At the same time, tight monetary policy has constrained the economy, with analysts expecting a contraction in gross domestic product this year.
What Bloomberg Economics Says
“We expect Chile’s central bank to cut its benchmark rate to 9.25% from 10.25% on Sept. 5 amid slower-than-expected inflation and weaker-than-anticipated domestic demand. A slower global growth outlook due to tight monetary conditions and China’s sputtering recovery also support our forecast. Forward guidance will likely signal additional cuts, with the magnitude depending on new data.”
— Felipe Hernandez, Latin America economist
Chile’s rate decision will be published on the central bank website at 6 pm local time in Santiago with a statement from the board. Here’s what to watch out for:
Easing Pace
Investors will be on the lookout for confirmation that policymakers plan to slow down the pace of easing. Another 1 percentage point reduction this week could very well be the last of that magnitude, while a smaller cut of 75 basis points would likely mean future adjustments will be made at that clip.
Central bank Vice President Pablo Garcia said on Aug. 26 that the board is sticking to plans to lower rates to 7.75%-8% by December, from the current level of 10.25%. Given that time-frame spans three policy decisions including today’s, it’s clear that the clip of 100 basis points won’t last long.
Policymakers will flush out easing plans in more detail in their quarterly monetary policy report, which will be published early on Wednesday.
Inflation Headwinds
Economists will also scour the central bank’s statement for insight on near-term consumer price pressures. Every year, Chile normally sees an inflation pick-up in September, when demand rises amid Independence Day celebrations.
On top of that, in August heavy rains hit parts of central and southern Chile known for their fruit and vegetable crops, with a farmers association putting total losses at $1 billion. Meanwhile, the peso recently hit its weakest level so far this year, threatening to drive up prices of key imports like fuel.
“BCCh will be monitoring monthly core inflation in order to make its monetary policy decisions,” Leonardo Suarez, research director at LarrainVial, wrote in a note, adding that “there are signs that BCCh will be concerned about the dollar rebound.”
China
Investors will be searching for the central bank’s view on the state of the Chinese economy, which is Chile’s biggest trading partner and a crucial buyer of goods from copper to wine.
Authorities in the Asian nation have rolled out stimulus to help stem housing sale declines, but they have had a limited impact to date. Financial markets will pay close attention to any sign that slower growth in China will damp global commodity costs and inflationary pressures.
Read more at Bloomberg.com