Chile to stay rates as Inflation recedes

In a recent survey of economists, all agreed that the board should maintain borrowing costs at 11.25%, the highest level in more than 20 years. Following a tightening cycle of 10.75 percentage points since July of last year, the decision would be in keeping with bank guidance that rates will be held stable.

Rosanna Costa, the president of Chile’s central bank, is adopting a cautious stance despite the fact that consumer prices have dropped from their three-decade high. In fact, private-sector analysts anticipate that the annual inflation rate will increase in a report that will be keenly monitored on Wednesday. Additionally, during the last three months, economic activity has outperformed market expectations.

“We expect the central bank to hold its benchmark rate at 11.25%. It should reiterate that the tightening cycle is over and monetary policy will remain tight until inflation is on track to return to the target. Inflation is falling but still above target, while activity is slowing but remains above potential.”

The rate-setting meeting takes place the day before Brazil is expected to maintain its borrowing costs at the same level as policymakers in the region’s biggest economy keep an eye on proposals for more expenditure. The same day when annual inflation accelerated further above target, Peru is anticipated to raise rates for the 17th consecutive time.

At six o’clock in Santiago, the central bank’s website will post Chile’s decision and a board statement. Here are some things to be wary of:
Despite the fact that annual inflation has slowed more than predicted for two consecutive months, economists anticipate the bank will stick to its stance that now is not the time to decrease interest rates.

In fact, authorities are likely to disagree with swaps market predictions that borrowing costs should decrease significantly starting in 2023.

Odds of an up-tick in annual inflation in November “argue for caution against cutting rates too soon after ending the tightening cycle at the October meeting,” according to Win Thin, Global Head of Currency Strategy at Brown Brothers Harriman & Co. “The swaps market is pricing in the start of an easing cycle within the next three months, which seems too soon.”

Costa emphasized that borrowing prices will remain at their current level for the time necessary to get inflation back on track to the 3% objective, from its current level of 12.8%, in her final public statements prior to the decision on Nov. 25.

Investors will look closely for comments on both domestic and global growth patterns in the statement. Recent indications that China, Chile’s primary trading partner, may relax Covid-19 limitations have spurred speculation about increased global demand and higher prices for commodities like copper. Copper is Chile’s main export.
However, experts warn that Chile hasn’t yet experienced the full impact of tighter monetary policy.

“It’s probable that the maximum effects of the Chile central bank interest rate hikes to 11.25% will be reflected in the first quarters of next year,” analysts at Bice Inversiones wrote in a note.

In its quarterly monetary policy report, the central bank of Chile will release its comprehensive growth and inflation estimates on Wednesday.