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17 Sep 2016
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Chile Holds Key Rate as Tightening Cycle Comes to Early End (1)
Philip Sanders and Laura Millan LombranaSep 16, 2016 12:03 pm ET
(Bloomberg) -- Chile kept borrowing costs unchanged after weaker inflation and economic growth prompted policy makers to signal the end of a tightening cycle following just two increases late last year.
The central bank’s board, led by bank President Rodrigo Vergara, kept the key rate at 3.50 percent for a ninth month, as forecast by all 22 analysts surveyed by Bloomberg.
Policy makers removed their tightening bias at the previous meeting in August, eliminating the prospect of further rate hikes as inflation slowed to within the target range and the economy contracted in the second quarter. Now, some analysts are forecasting an interest rate cut by year end after the inflation eased to a 30-month low in August and the central bank cut its growth forecast for 2017.
“A couple of months ago, we were talking about keeping or raising rates, now the conversation should be between keeping or cutting rates,” said Felipe Bravo, chief economist at Banco Santander Chile. “We need to have more certainty of what will happen with rates in the United States before we start thinking seriously about lowering rates in Chile.”
Annual inflation slowed to 3.4 percent in August from 4 percent the month before, well within the 2 percent to 4 percent target range.
“Annual inflation slowed to 3.4 percent, in line with forecasts," central bankers said in their statement announcing their decision. "Two-year inflation expectations remain at 3 percent."
Bank Credibility
Chile’s central bank didn’t need to do much to bring inflation back into the target range, raising borrowing costs just twice in late 2015, the smallest tightening cycle in 15 years. It was helped by its own credibility among economists, whose forecast for inflation two years ahead rarely varied from the 3 percent target, even as price-growth exceeded 4 percent for most of the past two years.
Recent economic data has fueled the incipient speculation that policy makers may now cut rates by year end.
The Imacec index, a proxy for gross domestic product, rose 0.5 percent in July from the same month a year earlier, the second-slowest pace in more than six years. Unemployment also rose to a five-year high in the three months through July, while wage growth has slowed to the weakest pace since December 2010.
"The main concern is the low growth that the Chilean economy keeps experiencing," Vergara said last week. "It is something that we not only need to worry about, but that we need to take as a priority."
(Updates to add comment from central bank statement in sixth paragraph.)
--With assistance from Dominic Carey To contact the reporters on this story: Philip Sanders in Santiago at psanders@bloomberg.net, Laura Millan Lombrana in Santiago at lmillanlombr@bloomberg.net. To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Robert Jameson
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