By Chile’s central bank announced on Tuesday a 25-basis-point drop in its benchmark interest rate to 5.00 per cent.
This action is part of an ongoing easing cycle that began in mid-2023 to stimulate economic development despite persisting price pressures.
The bank’s decision, unanimously approved by its board members, is consistent with market expectations and reflects a broader trend of tailoring monetary policy to the current economic backdrop.
Cooling inflation remains over target
According to recent economic data, Chile’s annual inflation rate fell to 4.2% in November from 4.7% in October.
Despite this decline, inflation rates remain higher than the central bank’s goal range of 2% to 4%.
The newest report also highlighted that November’s inflation rate exceeded the projections in the bank’s third-quarter monetary policy review, implying that the challenges of maintaining price stability remain.
The central bank’s statement underscored the intricacies of the short-term inflation picture, attributing rising cost pressures to various sources.
The institute predicts that inflation will hover around 5.0% in the first half of 2025, indicating probable difficulties in effectively controlling price increases.
A cautious approach to future rate cuts
Despite the central bank’s recent rate decrease and efforts to boost economic development, authorities expressed worry about the immediate inflation forecast.
The bank assessed the risk-reward balance as skewed to the upside, emphasizing the unpredictable economic environment.
“This highlights the need for caution,” the central bank declared, implying that policymakers must stay watchful and agile in response to developing economic patterns and potential shocks.
Against this backdrop, the central bank stated that it would continue to closely examine economic trends before considering further cuts to the benchmark interest rate.
Although July 2023 marked the beginning of an aggressive reduction phase, with rates reduced from 11.25% to 625 basis points, more cuts may not be forthcoming in the coming months.
JPMorgan analysts predict that a stop might occur in January 2024, with subsequent changes not expected until March of the following year.
Domestic demand and long-term economic forecasts
Looking ahead, the central bank’s outlook indicates a more stable internal economy.
The board noted that reduced domestic demand will likely reduce inflationary pressures in the medium run.
They argue that this pattern may lead to lower interest rates over the term.
This outlook reflects a cautiously optimistic view that, despite current inflation challenges, targeted and responsive monetary policy may help support economic recovery.
As the world’s leading copper producer, Chile’s economic health is closely tied to global commodity markets, which introduces additional uncertainties that policymakers must navigate.
A balanced act for Chile’s economy
Finally, the central bank’s choice to lower interest rates while being cautious about inflation concerns represents the difficult balancing act required to promote economic growth and maintain price stability.
With inflation continuing over intended levels and external economic factors playing a big influence, Chile’s next several months will be essential as it works to properly handle these issues.
The relationship between interest rates, inflation, and domestic demand will be critical in determining the success of the country’s monetary policy in 2024 and beyond.
As a result, stakeholders will closely monitor the central bank’s actions and economic data releases in the pursuit of a more stable economic climate.
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