Chile Lifts Key Rate to 3% as Growth Eyed Over Low Inflation
(Bloomberg) -- Chile raised its benchmark interest rate by a quarter point as policy makers look past below-target inflation to expectations for strong growth and investment.
The bank board, led by its President Mario Marcel, on Wednesday lifted borrowing costs to 3 percent, in a unanimous decision that was expected by all 21 analysts in a Bloomberg survey. In an accompanying statement, policy makers said the economy became more dynamic in the fourth quarter and reiterated that their tightening cycle will be "gradual and cautious."
Chile’s recent growth figures have beaten analyst forecasts amid a surge in mining, and falling unemployment is helping to support demand. While lower oil costs are credited with keeping headline inflation under the three percent target, a key price gauge that excludes volatile food and energy bills has been rising since May. For investors, these factors mean days of more subdued inflation are likely numbered.
"The central bank is on a mission to normalize the stance of monetary policy by removing stimulus," Alvaro Mollica, a macro strategist at XP Investments in New York, said before the rate decision. "Core inflation, the central bank’s preferred metric given its relationship to economic activity, is slowly creeping up and economic activity data hasn’t faltered."
Lower costs of food, beverages and gasoline in December led to Chile’s first monthly deflation since 2017, a reading that many analysts saw as a blip. Meanwhile, November’s 3.1 percent jump in economic activity from a year prior, a result that was higher than all but one analyst forecast, boosted interest rate swaps.
Traders expect borrowing costs to reach 4 percent within the next two years, according to a central bank survey from January 25, while a separate economists survey shows GDP growth at 3.6 percent this year.
Reasons for cautious monetary policy are aplenty. Retail sales in the capital city of Santiago contracted the most in a decade last year, according to Chile’s Chamber of Commerce. The ongoing risk of a global trade war is threatening the price of copper, Chile’s main export, and also economic growth in China, which is the country’s main trading partner.
Despite these risks, the central bank is giving more weight to domestic indicators showing strong growth, according to Bloomberg Economist Felipe Hernandez. "The results point to the central bank slowly reducing monetary accommodation after a pause last month," he said before the rate announcement.
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