Chile Cuts Interest Rate By 50 Bps to 2%

The Central Bank of Chile cut its benchmark interest rate by 50 bps to 2 percent at its 3 September 2019 meeting. The unanimous decision was backed by a 10 bps decline in headline inflation (2.2% YoY in July) and triggered by a worsening of the external economic scenario. Policymakers noted that activity, exports and domestic demand indicators came below expectations since the last meeting. They also mentioned that growth expectations for 2019 were revised down to 2.6 percent. They underscored that the convergence of inflation to target will probably take longer than expected, which justifies further monetary stimulus.

Excerpts from the Statement of the Central Bank of Chile:

The main development since the previous Meeting has been the worsening of the external scenario. Especially significant has been the escalating trade conflict between the United States and China, with an impact on other economies that are integrated into value chains and financial markets. Global activity continued to slow in an important group of economies, where the weakening of manufacturing stood out, while services activity remains dynamic. The deterioration is deeper for global trade volumes, which virtually stagnated, and for expectations indicators. The trade conflict is compounded by the greater likelihood of a non-deal exit of the United Kingdom from the European Union, various geopolitical risks and a severe deterioration of the situation in Argentina. In this context, monetary policy has become more expansionary globally, but still financial markets continue to show high volatility and risk aversion. Thus, further declines in interest rates were observed in the fixed-income market, together with stock market relapses, depreciation of most currencies against the dollar and widespread falls in commodity prices. Inflationary figures remain contained in many economies around the world. 

In the second quarter, domestic activity and demand growth disappointed expectations. GDP growth was influenced by one-off supply-side factors and a fall in manufacturing. On the expenditure side, less progress was made in private consumption, although some of the one-off factors that affected GDP also had an impact on consumption growth. This, in a context in which consumer expectations have deteriorated from early in the year and private salaried employment shows less dynamism. Investment grew more than anticipated, thanks especially to its PRESS RELEASE* [INF*RES*AS] construction and other works component, offsetting a lower-than-expected expansion of machinery and equipment. Exports performed worse than expected. In this scenario, economic growth expectations have been adjusted downwards. The August Economic Expectations Survey (EES) anticipates GDP growth of 2.6% for 2019, 3.1% for 2020, and 3.3% for 2021.

The Board’s decision considers that the economy’s performance of the second quarter and its outlook indicate that inflation will take longer to converge to the target, calling for a stronger monetary stimulus. It also estimates that further stimulus might be required, which will be evaluated in the upcoming meetings in light of the evolution of the macroeconomic scenario. With that, the Board reiterates that it will conduct monetary policy with flexibility, so that projected inflation stands at 3% over the two-year horizon.

Chile Cuts Interest Rate By 50 Bps to 2%

Mario |
9/3/2019 10:10:43 PM