Chile Central Bank Slashes Interest Rate by Full Percentage Point as Inflation Withers

(Bloomberg) -- Chile’s central bank slashed its key interest rate by a full percentage point, speeding up the pace of monetary easing for the second meeting in a row after inflation slowed more than expected last month.

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Four of the five policymakers voted to cut borrowing costs to 7.25% late on Wednesday, with the other backing a reduction of 125 basis points. The decision was forecast by 17 of 21 analysts in a Bloomberg survey, with three others predicting 75 basis points and one seeing 125 basis points.

“The Board considers that the convergence of inflation to the 3% target would materialize sooner than expected,” policymakers said in the statement accompanying the decision. The key interest rate will “reach its neutral level during the second part of 2024.”

Policymakers have now lowered borrowing costs by four percentage points since July as their 3% inflation goal comes into reach and domestic activity picks up very gradually. While other Latin American nations are also relaxing monetary policy, Chile has more room to do so because its economy fared far worse last year. Bets for steeper cuts were also juiced by December’s drop in both the headline inflation rate and a core gauge that excludes volatile items.

“The decision to move to the lower limit of the key rate corridor shows that the inflationary surprise in December was substantial and that convergence to the target will be faster than projected in December,” said Samuel Carrasco, chief Chile economist at Credicorp.

Read more: Chile Consumer Prices Post Biggest Monthly Drop Since 2013

Chile’s decision came hours after the Federal Reserve left rates unchanged and Chair Jerome Powell threw cold water on hopes that reductions would begin in March.

Signs of continued weakness abound in Chile’s economy. At 8.5%, unemployment remains high and the country has hundreds of thousands fewer jobs now than it did before the pandemic. A measure of business confidence plunged in December.

Earlier today, the statistics agency reported that manufacturing output unexpectedly contracted in December, dropping 1.8% from the year earlier.

At the same time, inflation slowed more than expected in December, easing to 3.9%. And while central bank projections published last month show the headline rate hitting the target later in 2024, analysts expect the goal to be reached in the first half.

Still, policymakers are keeping their eyes on potential threats to the inflation outlook, including possible spikes in commodity costs as well as financial market volatility due to global geopolitical conflicts.

The peso has tanked 7.3% since the prior rate-setting meeting in December, the biggest drop among major emerging market currencies tracked by Bloomberg over that period. A weaker exchange rate makes imports more expensive, and Chile is particularly vulnerable given that it buys nearly all its fuels from abroad.

--With assistance from Giovanna Serafim, Rafael Gayol and Carolina Gonzalez.

(Updates with analyst comment in the fifth paragraph.)

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