Chile’s Central Bank Hits Pause on Interest Rate Cuts Amid Rising Inflation Risks
Chile’s central bank has put the brakes on its interest rate cutting cycle, citing increased uncertainty and inflation risks both domestically and globally. The decision to hold borrowing costs at 5% was unanimous among policymakers, led by Rosanna Costa, and in line with analyst expectations.
Inflation Concerns Take Center Stage
A weaker peso, higher labor costs, and increased electricity tariffs are driving inflation dynamics, according to the central bank’s statement. Policymakers are taking a cautious approach as they navigate a near-term surge in inflation that has prevented it from slowing towards the 3% target. Wages and electricity costs are on the rise, while the peso has hit its weakest level since mid-2022, making imports more expensive.
Economic Activity Shows Signs of Improvement
Despite the inflation concerns, economic activity is slowly firming up. Available data points to a better-than-expected performance in the fourth quarter, with industry and commerce showing gains. However, commercial bank lending and the labor market remain weak.
Global Economic Uncertainty Weighs
The central bank warned of high unpredictability in the global economy, citing volatile financial markets and ongoing sources of uncertainty, including the change of government in the United States. This uncertainty is likely to impact the Chilean economy, particularly with the US Federal Reserve expected to pause its easing cycle and US President Donald Trump’s plans for trade tariffs and lower taxes.
Future Rate Adjustments Remain Uncertain
The central bank’s statement leaves the door open to future rate adjustments, with policymakers committed to evaluating the macroeconomic scenario and its implications for inflation convergence. Analysts expect gross domestic product to expand 2.1% in 2025, but the central bank’s hawkish bias may lead to rate increases if inflation expectations rise.
Experts Weigh In
Florencia Ricci, head of Economy and Markets at Banchile Inversiones, noted that the central bank is signaling increased inflation risks and eliminating language that suggested a downward trajectory for the monetary policy rate. Felipe Klein, an economist at BNP Paribas, believes that policymakers recognize the uncertainty surrounding long-term inflation expectations, leaving the door open to potential rate increases.
Leave a Reply