Chile Restarts Interest Rate Cuts and Strikes Dovish Tone on Economic Outlook
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Loading... - Alessia Abato
- 10 Sep 2024
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Chile's central bank has taken a decisive step towards easing monetary policy, cutting its key interest rate by 25 basis points to 5.5%. This move, unanimously approved by policymakers, signals a shift towards a more dovish stance on the economy. The bank's decision is based on its assessment that the recent increase in activity is largely due to one-off factors, and that underlying bank credit and local spending remain weak.
The central bank's statement suggests that it is confident that inflation will slow down in the medium term, and that the risks of sustained inflation are low. Policymakers expect the economy to meet their forecasts, which would allow for a faster reduction of the key rate towards its neutral level. This could lead to additional rate cuts this year and next, with the rate potentially reaching 4.0% by the end of 2025.
The bank's dovish tone is a response to the struggling economy, which contracted in the second quarter before rebounding in July. The central bank is cautious about the uptick in inflation, partly driven by higher electricity tariffs, but believes that price gains will slow down in line with the target over the next two years. This is reflected in the central bank's surveys of economists and traders, which continue to show consumer price growth at target in two years.
The Chilean economy has been experiencing a slowdown in growth, with gross domestic product (GDP) contracting for the first time in a year in the second quarter. Although activity rebounded in July, the central bank remains cautious, citing weak bank credit and local spending as concerns. The unemployment rate has also risen, although this is partly due to seasonal factors.
The central bank's decision to cut interest rates is likely to have a positive impact on the economy, as it will make borrowing cheaper and stimulate consumption and investment. However, the bank must balance this against the risk of inflation, which is currently above target. The bank's forward guidance suggests that it is willing to take a more aggressive approach to monetary policy, which could lead to further rate cuts in the coming months.
The Chilean peso is expected to depreciate as a result of the interest rate cut, which could lead to higher import prices and inflation. However, the central bank believes that the risks of persistent inflation are low, and that the economy will benefit from the stimulus provided by the rate cut.
In conclusion, the Chilean central bank's decision to cut interest rates is a significant move towards easing monetary policy and stimulating the economy. The bank's dovish tone suggests that it is willing to take a more aggressive approach to monetary policy, which could lead to further rate cuts in the coming months. However, the bank must balance this against the risk of inflation, and ensure that the economy does not overheat.
