(Bloomberg) -- Chile’s central bank cut its key interest rate by a quarter point for the third meeting and delivered a stern warning on short-term inflation challenges, raising the odds of a coming pause to its easing cycle.
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Policymakers led by Rosanna Costa voted unanimously to lower borrowing costs to 5% late Tuesday, as expected by all analysts in a Bloomberg survey except three who forecast no change. Rates have tumbled from 11.25% in mid-2023.
In an accompanying statement, policymakers wrote that the inflation outlook has become more daunting. Chile’s consumer price dynamics have come under pressure from factors including a weaker peso, rising electricity tariffs and higher labor costs that include “significant” wage gains.
“The balance of risks for inflation is biased to the upside in the short term, which highlights the need to be cautious,” policymakers wrote. “The board will gather information with respect to the economy to evaluate the opportunity for further rate cuts in coming quarters.”
Central bankers extended their easing cycle as inflation expectations remain anchored at the 3% target in two years. Domestic activity is facing numerous headwinds — demand from top trading partner China is weakening, while locally unemployment is high and business confidence levels are subdued. Still, global geopolitical and economic volatility is giving reason for caution.
“We interpret the decision as a ‘hawkish cut’ that signals the central bank will take some time to assess if macro conditions allow for additional cuts toward the nominal neutral rate range,” said Andres Perez, chief Latin America economist at Banco Itau. “The easing cycle to pause, for now.”
Board members have estimated the neutral rate — which neither stimulates nor restricts the economy — at between 3.5% and 4.5%. While central bankers signaled in their statement that rates should fall over their policy horizon, they did not reference when borrowing costs will reach the neutral level.
5% Inflation
Annual inflation was 4.2% last month, according to the national statistics institute. Consumer prices will remain pressured, most notably due to a new electricity tariff hike scheduled for January as well as a fresh slide in the peso, which has weakened some 11% against the dollar this year.
Given those price drivers, annual inflation is likely to fluctuate around 5% in the first half of next year, policymakers wrote in the statement. Weaker domestic demand will mitigate cost-of-living increases in the medium-term, they wrote.