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(Bloomberg) -- Chile’s central bank paused its cycle of interest rate cuts and left all options on the table for future borrowing cost adjustments, citing heightened uncertainty as well as domestic and global inflation risks.
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Policymakers led by Rosanna Costa voted unanimously to keep borrowing costs at 5% late on Tuesday, as expected by all analysts in a Bloomberg survey. In an accompanying statement, board members wrote that a weaker peso, higher labor costs and an increase in electricity tariffs are driving inflation dynamics.
“Inflation risks have increased, which reinforces the need for caution,” they wrote.
While the statement published following the prior rate decision in December raised the prospect of rate cuts “in the coming quarters,” today’s communique was more open-ended, saying “the Board will evaluate the future movements of the monetary policy rate by considering the evolution of the macroeconomic scenario and its implications for the convergence of inflation.”
Chile central bankers are turning more cautious as they ride out a near-term jolt to inflation that has prevented it slowing toward the 3% target. Wages and electricity costs are rising, while the peso hit its weakest level since mid-2022, making imports more expensive. Meanwhile, economic activity is slowly firming.
“They signal that the risks for inflation have increased,” said Florencia Ricci, head of Economy and Markets at Banchile Inversiones. “In addition, they eliminate the phrase that indicates that the monetary policy rate will follow a downward trajectory, thus avoiding giving signs about future movements.”
Swap rates on the one-year contract rose as much as 13.7 basis points on Wednesday following the central bank’s rate hold and hawkish statement.
Chile’s decision came a day before the Federal Reserve is expected to pause its own easing cycle. That move, coupled with US President Donald Trump’s plans for trade tariffs and lower taxes, portends a stronger dollar worldwide.
Rate Increases
In their statement, Chile central bankers warned of high unpredictability in the global economy. “In this context, global financial markets have been highly volatile in recent weeks, amid the change of government in the United States and developments in other ongoing sources of uncertainty,” they wrote.