(Bloomberg) -- Chile’s central bank lowered its interest rate by a quarter percentage-point, playing down the risks of sustained inflation while indicating borrowing costs could fall faster than previously expected in a dovish shift.

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Policymakers voted unanimously to cut borrowing costs to 5.5% on Tuesday, as expected by nearly all analysts in a Bloomberg survey. In a statement, board members wrote a recent increase in activity was due largely to “one-off factors,” and that both bank credit and local spending are weak.

If the economy meets central bank forecasts, “the reduction of the key rate toward its neutral level will be somewhat faster than expected in June,” policymakers wrote. “This will occur at a pace that will factor in the evolution of the macroeconomic scenario and its implications for the path of inflation.”

Chilean central bankers led by Rosanna Costa relaxed monetary policy as growth in one of Latin America’s richest economies has been slow to gain traction. Gross domestic product contracted in the second quarter before activity rebounded in July. Board members remain cautious as they navigate an uptick in inflation spurred in part by higher electricity tariffs.

What Bloomberg Economics Says

“A rate cut and dovish forward guidance on Tuesday show Chile’s central bank is confident that faster inflation will pass, with price gains poised to slow in line with the target over the next two years. Policymakers see more cuts bringing the rate to its neutral level earlier than previous forecasts.”

— Felipe Hernandez, Latin America economist

— Click here for full report

Chile’s key rate has now fallen from a high of 11.25% seen in 2023. The central bank had paused its easing cycle at its prior meeting in July.

In their statement, central bankers wrote that Chile’s economic activity lost momentum in the second quarter.

“Although this was expected after the high dynamism early in the year, the drop was greater than expected,” they wrote.

Quarterly economic data showed a fall in consumption and stability in investment, according to policymakers. Unemployment has risen, though the increase was partly due to seasonal factors, they wrote.

“The central bank statement emphasizes dovish aspects,” said Sebastian Diaz, an economist at Pacifico Research. “They are seeing weak activity.”

The bank trimmed its range for expected economic growth this year, to between 2.25% and 2.75%, according to estimates published Wednesday in its quarterly monetary policy report. Forecasts for 2025 were kept unchanged, at between 1.5% and 2.5%.

The peso tumbled 0.9% in Wednesday morning trading, the biggest drop among Latin American currencies.

Inflationary Persistence

Central bank surveys of economists and traders continue to show consumer price growth at target in two years, which is the time-frame for monetary policy. Still, annual inflation hit 4.6% in July and is expected to speed up even further in the near-term.

“The combined information available suggests modest changes in the outlook for activity, although spending shows greater weakness,” central bankers wrote. “This, together with inflation expectations in line with the 3% target, reduces the risks of further inflationary persistence in the medium term as a result of the cost shock.”

Central bankers raised their 2024 year-end inflation estimate to 4.5% from 4.2%, according to Wednesday’s report. They see consumer price growth at 3% in 2026.

Chilean policymakers are signaling the risks of persistent inflation are low and that they are more concerned about the slowdown in spending, Credicorp Capital analysts Daniel Velandia and Samuel Carrasco wrote in a note, adding that they expect the peso to depreciate and short-term interest rates to decline.

The statement “indicates that the reduction in the policy rate toward its neutral level will be faster than expected in June,” Velandia and Carrasco wrote. “The forward guidance reads more aggressive than before.”

--With assistance from Giovanna Serafim, Rafael Gayol and Valentina Fuentes.

(Adds new central bank forecasts starting in 11th paragraph)

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