Chile puzzles markets with rate cut
A cut in Chile’s benchmark interest rate surprised many, leaving analysts unsure what to expect next
The Central Bank of Chile's 25 basis point reduction in the
country's benchmark interest rate to 4.75% came sooner than
many analysts expected. Market participants are now awaiting
the release of minutes, to gain a better idea of where interest
rates are headed.
"Although the economic context has not shown further signs of
deceleration, the consolidation of a scenario with lower global
growth and less favorable terms of trade for Chile led the
Central Bank to lower the policy rate," Credicorp said, noting
the bank would be watching the fiscal situation in the U.S. and
inflation expectations in Chile for the medium and long
The US Federal Reserve's decision to postpone a tapering of
quantitative easing, and the fact that "many" leading
indicators were pointing to a further slowdown of internal
demand, would have been factored into the decision, the bank
Calling the timing of the decision "puzzling," RBS noted that
the central bank's post-decision statement provided no obvious
justification to cut rates. "Without any major change in the
balance of risks from the last statement, if the intention was
to ease, then the [central bank] could have just as well cut
last month," it said.
The bank noted a small change in the inflation outlook,
resulting in a slower convergence of the rate towards the
long-term target of 3% within the 24-month target period. The
implications of easy liquidity for some time longer on the back
of the Fed, together with slower convergence may have
influenced the decision, RBS said, but says this makes less
sense since the balance of risks for growth did not change. RBS
did not make an immediate call for the next meeting.
The decision "is justified by this year's below-trend economic
growth and below-target inflation rate," Itaú said. The
bank also calls the timing "puzzling," given that the most
recent retail sales number was strong, and the central bank's
tone until now had been suggesting that the board was
uncomfortable providing stimulus to an economy in which
consumption continues to expand at an unsustainable pace.
Itaú expects another rate cut in November, leading to a
year-end rate of 4.25%. It expects growth to remain below
potential and inflation below the target in 2014, leaving room
for the central bank to resume the easing cycle with two
additional 25 basis point cuts to 4%.
Barclays expects the Central Bank to hold at 4.75% in
November before cutting again to 4.5% by year-end.
"The recent strengthening of the exchange rate could have
increased the board's sensitivity to the almost chronically
weak inflation and triggered an early cut to try to prevent
headline CPI from falling below the target tolerance range,"
Barclays said. LF