Chile puzzles markets with rate cut

Chile puzzles markets with rate cut

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 term.

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 said.

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