Chile Rate Cut Bets Shift Again With Smaller Reduction Now Seen

(Bloomberg) -- Chile economists are betting a weaker peso and back-to-back inflation surprises will force the central bank to slow the pace of interest rate cuts next month.

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Policymakers will lower borrowing costs by 75 basis points to 6.5% in April, compared to the prior forecast of another full percentage point decline, according to a monthly central bank survey of economists published Tuesday. Rates will end the year at 4.5%, the poll showed, above 4.25% previously.

The shift marks a reversal from January, when one central bank board member suggested weighing a cut of 150 basis points, spurring bets of even faster reductions ahead. However, consumer prices rose more than expected in the first two months of the year and a weak peso is also sending the costs of key imports such as fuel even higher.

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

“They have to be careful because the exchange rate continues to be weak,” said Arturo Claro, an economist at Econsult in Santiago. “With consumption that’s recovering at the margin, it will be easier for companies to pass on the stronger dollar to final prices.”

The peso has weakened almost 9% against the dollar this year, the worst performance among emerging market currencies tracked by Bloomberg.

Read more: Traders Dial Back Bets on Rate Cuts Behind World’s Worst FX Rout

In February, consumer prices rose 4.5% from a year prior in the chained series, above the 3% target. Still, Chile’s inflation is continuing with its return to the “objective level” despite the February consumer price data, according to a presentation this week from central bank Vice President Stephany Griffith-Jones.

On Jan. 31, Chile’s central bank sped up the pace of easing for the second straight meeting, delivering a full percentage point drop to 7.25%. Policymakers had previously slowed cuts amid a surge in US Treasury yields late last year.

The next monetary policy meeting is scheduled for April 2.

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