Chile Central Bank Chief Plans to Unwind Tight Monetary Policy

(Bloomberg) -- Chile’s central bank plans to continue cutting its benchmark interest rate, the institution’s president said, pointing to inflation that’s closer to target and consumer price expectations anchored at that goal.

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Recent price rises have been concentrated in a small number of items without generalized cost-of-living pressures, Rosanna Costa said, according to the text of a speech posted on the central bank website Tuesday. Core inflation measures that exclude volatile items have slowed constantly.

“To the extent that economic imbalances are worked out — with expectations that are anchored and inflation closer to target — the benchmark rate should converge toward its neutral level,” Costa said. The central bank has previously indicated that level is around 4%.

Chile investors are examining their inflation and interest rate expectations ahead of the next central bank policy decision on April 2. While consumer prices plunged in December, they rose much more than expected in the two subsequent months. The Chilean peso has weakened more than 8% this year and the economic recovery is gaining strength, fueling market concerns about cost-of-living pressures.

Read more: Chile Inflation Tops All Forecasts as Peso Rout Intensifies

Costa pinned the weakening currency on pressure from local interest rate reductions that are advancing much quicker than in other countries. Unlike before, that decline in the peso is not occurring in a context of greater domestic risk, she said.

A weaker currency, coupled with rising transportation and fuel costs globally, are factors that can stoke inflation, Costa said. Still, Chile’s economy is in a much better position than in years past and, in that context, monetary policy can better handle any shocks that may arise, she said.

Consumer prices increased 0.6% in February compared to the month prior, above all forecasts in a Bloomberg survey with a 0.2% median estimate. Annual inflation accelerated to 4.5% in the chained series, up from 3.8% the month before, the national statistics institute reported on March 8.

Chile’s central bank has cut borrowing costs by four percentage points since July, lowering rates to the current level of 7.25%.

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