(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.
Locally, annual inflation accelerated to 4.5% in December, and Costa has warned that it will remain near 5% early in 2025. In Tuesday’s statement, central bankers pointed out that traders see prices rising above target in two years.
Cost-of-living pressures are firming even as domestic economic growth remains uneven. Overall, available data point to a better-than-expected activity in the fourth quarter, policymakers wrote. At the same time, both commercial bank lending and the labor market remain weak, they wrote.
Analysts surveyed by Chile’s central bank expect gross domestic product to expand 2.1% in 2025. Most recently, economic activity ticked up for the second straight month in November as industry and commerce gained.
Going forward, the central bank’s statement leaves the door open to an even more hawkish bias, said Felipe Klein, an economist at BNP Paribas. Policymakers recognize that it is not so clear that long-term inflation expectations are anchored, he said.
“With a surprise in short-term inflation or a further depreciation in the exchange rate, longer-term inflation expectations could begin to rise,” he said. “If that happens, it would not be strange for analysts to begin evaluating not only the timing of the next declines, but also the possibility of monetary policy rate increases.”
–With assistance from Giovanna Serafim.
(Updates with market move in 7th paragraph)
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Source: finance.yahoo.com