Chile’s Central Bank Will Likely Slow the Pace of Interest Rate Cuts for Second Meeting

(Bloomberg) -- Chile’s central bank will probably slow the pace of monetary easing for the second straight meeting on Thursday as policymakers turn increasingly cautious due to inflationary threats from the global economy.

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All economists in a Bloomberg survey expect the bank to cut rates by half a percentage point to 6% after the markets close. The reduction would follow prior drops of 75 and 100 basis points, and extend an easing cycle that’s already slashed borrowing costs by 4.75 percentage points since July.

Chilean central bankers led by Rosanna Costa are seen recalibrating rate cuts as the Federal Reserve’s delay to its own monetary easing and more expensive commodities stoke inflation fears. Locally, consumer prices rose more than forecast in three of the first four months of 2024. Still, policymakers have gotten help from a recent rebound in the peso, while both economists and traders see cost-of-living increases back at the 3% target within two years.

What Bloomberg Economics Says

“We expect Chile’s central bank to cut the benchmark rate to 6.0% at its May 23 meeting, from 6.5%. Monetary conditions remain tight and inflation and activity data since the April meeting support the central bank’s base-case scenario for a rate close to 5.5% in June and 5.0% by year end. Peso appreciation provides more flexibility, but a high-for-longer Federal Reserve is a constraint.”

— Felipe Hernandez, Latin America economist

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Chile’s rate decision will be published on the central bank website at 6 p.m. local time in Santiago with a statement from the board. Here’s what to watch out for:

Within Expectations

Chile’s annual inflation rate rose further above the 3% target in April, backing central bankers’ shift toward more cautious guidance at their policy meeting that month. Investors expect board members to acknowledge that pickup, while also emphasizing the increase is temporary and within their expectations.

A top factor behind the faster inflation readings so far in 2024 is the peso, which tumbled at the start of the year but has since been on a tear. The currency has appreciated over 7% since the April 2 policy meeting, leading global gains during the period on higher prices of copper, which is Chile’s top export.

Financial markets will be eager to see how central bankers describe the peso’s recovery and its effect on monetary policy. Chile is a small and open economy that’s vulnerable to inflationary pressures if the currency weakens given the nation imports many crucial goods, including most of its fuel.

“We expect FX appreciation to contribute to an easing of tradables core inflation, and that it will also slam the brakes on fuel prices,” Leonardo Suarez, research director at LarrainVial, wrote in a note.

Federal Reserve

Investors are increasingly attuned to how Chile’s central bank will acknowledge the smaller difference between its own benchmark rate and the Federal Reserve’s, as well as the risk of outflows that shrinking gap may produce.

“Given the lingering uncertainty over the timing of policy normalization by the FOMC, lowering Chile’s policy rate below the Fed’s without clarity of how long this pattern will hold would pose” risks to the peso, financial stability and the inflation outlook, Deutsche Bank analysts led by Chief Latin America Economist Francisco Campos wrote in a note.

--With assistance from Rafael Gayol and Giovanna Serafim.

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