(Bloomberg) -- Chile’s central bank said rising short-term inflation forecasts require cautious monetary policy and that including pauses in the institution’s yearlong easing campaign is reasonable.
Central bankers weighed options of a quarter-point cut or holding the interest rate steady at their July 31 decision, policymakers wrote in the minutes to that meeting, when they paused by keeping borrowing costs unchanged at 5.75%. A weaker peso and electricity bill hikes pushed up the inflation outlook for later this year and the start of 2025, they wrote.
“Lowering the rate at this Meeting would limit the leeway for the rest of the year,” they wrote in the document published Friday. At the same time, board members reaffirmed their strategy of having borrowing costs “that would be further reduced over the monetary policy horizon.”
Chilean central bankers led by Rosanna Costa are facing a combination of slowing activity and above-target inflation. Both the government and private sector analysts have trimmed their 2024 economic growth forecasts as sectors including services turn weaker. At the same time, staggered hikes in electricity tariffs will keep consumer price rises pressured through next year.
In the minutes, policymakers wrote that “the direct impact of electricity prices on inflation would be significant, but transitory.”
Annual inflation in the chained series sped up to 4.6% in July on the back of more expensive housing and energy costs, the national statistics institute reported Aug. 8. Chile’s central bank targets cost-of-living rises of 3%.
On the local economy, central bankers wrote partial second-quarter data showed slower-than-expected activity. “However, a more thorough analysis pointed to some specific factors in this result, while domestic demand performed relatively in line,” they wrote.
Both economists and traders expect the central bank to lower borrowing costs to 5.25% by December, according to surveys published earlier this week. Policymakers will have three rate-setting decisions in that period.
Global investor attention is also focused on the Federal Reserve, which is expected to cut US borrowing costs starting in September. Falling rates in the world’s largest economy stand to support currencies in emerging markets like Chile, thus helping the fight against local inflation.
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