Limited impact: A street market in the Lastarria neighbourhood in Santiago, Chile. The central bank board members said both headline and core inflation have diminished in recent months and upward price risks from earlier this year have moderated. — Bloomberg
SANTIAGO: Chile’s central bank kept its interest rate unchanged and signalled it will resume cuts in coming months as long as the economic impact from global uncertainty – including the Middle East conflict – remains limited.
Policymakers led by Rosanna Costa voted unanimously to hold borrowing costs steady at 5% late on Tuesday, as expected by 16 of 21 analysts in a Bloomberg survey.
The remaining five forecast a quarter-point reduction to 4.75%.
In a statement, board members noted headline and core inflation have diminished in recent months and upward price risks from earlier this year have moderated.
While domestic activity has exceeded projections, recent events in the Middle East “have introduced a new source of uncertainty, which could develop into more complex scenarios,” they wrote.
If the bank’s baseline scenario materialises in coming quarters, the key rate “will be approaching its range of neutral values,” they said.
Policymakers have previously estimated the neutral rate – which neither stimulates nor restricts the economy – at between 3.5% and 4.5%.
Chile’s inflation has stood above the 3% target since 2021 following several local and global price shocks.
In recent weeks, traders started forecasting it will hit the goal in two years – board members’ preferred time horizon to fully capture the impact of monetary policy.
Still, the South American nation imports the majority of its fuel, meaning that surging oil costs amid missile attacks between Iran and Israel pose a risk.
“While we anticipate the cycle to resume in July, the risk is that swings in the external backdrop delay cuts until September,” said Andres Perez, chief economist for Latin America at Banco Itau.
“We foresee the cycle concluding at 4% early in 2026. As such, we believe that the evolution of the external environment will be key in calibrating the path toward the neutral level.”
In their statement, central bankers wrote the global economy has been characterised by unpredictability stemming from trade tensions.
“The escalation of the military conflict in the Middle East adds further uncertainty to this scenario,” policymakers wrote.
“Its scope, development and potential impacts on the global and local economies are unknown, hence the need to monitor it closely.”
Locally, annual inflation slowed to 4.4% in May, hitting the lowest level since last November. — Bloomberg
