(Bloomberg) -- Chile’s central bank cut its key interest rate by a quarter-point for the second straight meeting and signaled borrowing costs will keep falling to a neutral level as the economy struggles to gain traction.
Board members voted unanimously to lower borrowing costs to 5.25% late on Thursday, as expected by all analysts in a Bloomberg survey. In an accompanying statement, policymakers wrote that monthly economic activity figures have been “significantly volatile.”
“The key rate will see further reductions to meet its neutral level,” as long as the economy develops in line with central bank forecasts, policymakers wrote. “This will occur at a pace that will consider the evolution of the macroeconomic scenario and its implications for inflation’s trajectory.”
When borrowing costs stand at a neutral level, they neither stimulate nor restrict economic activity.
Policymakers led by Rosanna Costa are loosening policy as both the central bank and economists see inflation easing back to the 3% target after overcoming near-term pressures, such as a 23% jump in electricity prices this month. The bank also has room to reduce rates as unemployment remains high, confidence levels are muted and economic activity unexpectedly dropped in August.
“This is the time for fine-tuning,” said Nathan Pincheira, chief economist at Fynsa in Santiago. “The economy continues to show signs of weakness and relative stagnation. There’s no doubt rates are heading toward a neutral level.”
In the statement, central bankers wrote that high-frequency indicators for consumption and investment have been relatively stable for some months. Economic activity in August was bolstered by mining, they wrote.
While Chile’s economy has been boosted by higher prices of copper — the nation’s top export — services have declined and the government has slashed its forecast for domestic demand growth this year to just 1.5%. Finance Minister Mario Marcel said late last month investment will pick up going into 2025.
“We expect Chile’s central bank will continue the easing cycle with 25bp cuts in the next meetings until reaching 4% by June 2025,” said Andres Perez, chief Latin America economist at Banco Itau.
Volatile Items
Annual inflation eased to 4.1% in September, according to the national statistics agency. Policymakers wrote the slowdown was hastened by volatile items like food.
Costa had previously said consumer prices will remain pressured into the first months of next year before starting a sustained decline and hitting the 3% goal early in 2026.
In late September, President Gabriel Boric proposed a 2.7% public spending increase in 2025 as the government seeks to step up the fight against crime and respond to other social demands. His plan still requires congressional approval.
On the global economy, Chile policymakers wrote that some data in the US point to a more dynamic labor market and higher-than-expected inflation at the margin as the Federal Reserve eases policy. Meanwhile, external risks “have increased with the intensification of conflict in the Middle East,” they wrote.
Still, for Samuel Carrasco, chief economist for Chile at Credicorp Capital, those global factors have not been disruptive enough to divert the central bank from its rate cut plan laid out in its most recent quarterly monetary policy report.
“The monetary authority will likely continue with its easing cycle in coming meetings,” he wrote. “Nevertheless, we will closely follow the events in the Middle East, stimulus announcements in China, the weakening of the peso and US elections.”
--With assistance from Giovanna Serafim and Rafael Gayol.
(Updates with central bank comments starting in second paragraph, economist comments starting in sixth paragraph)
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