Chile to Restart Gradual Interest Rate Cuts as Economy See-Saws

(Bloomberg) -- Chile’s central bank will likely cut its benchmark interest rate by a quarter-point Tuesday, restarting a monetary easing cycle to boost the economy as it emerges from a rough patch in the second quarter.

Seventeen of 20 analysts in a Bloomberg survey expect policymakers led by Rosanna Costa to lower borrowing costs to 5.5% after the market closes today. Three others expect rates to be left on hold for the second straight meeting.

Chilean central bankers have room to ease monetary policy as analysts see inflation hitting the target in two years, and recent data shows local demand is still unsteady. Gross domestic product shrank for the first time in a year in the second quarter before activity rebounded in July. Board members will remain watchful as electricity tariff hikes work their way through the economy, temporarily driving consumer price rises further above the 3% goal.

What Bloomberg Economics Says

“We expect Chile’s central bank to hold its benchmark rate at 5.75% for a second consecutive meeting. Forward guidance is likely to reiterate there’s little room for additional cuts this year, while keeping the door open for more accommodation next year, depending on new data. Accelerating inflation and rising short-term inflation expectations are risks. Pressure is supposed to be transitory, but uncertainty about the outlook is high and supports caution.”

— Felipe Hernandez, Latin America economist

Chile’s rate decision will be published on the central bank website at 6 p.m. local time in Santiago with a statement from the board. Here’s what to watch out for:

Electricity Effects

Investors will scan the statement for comments on electricity tariff increases that are helping propel annual inflation toward 5%.

While the central bank will publish full consumer price forecasts in its monetary policy report on Wednesday, markets will still seek confirmation in Tuesday’s statement that board members see the electricity hike effects as temporary.

This year, Chilean lawmakers approved a series of increases to electricity costs that had been frozen since 2019. The first rise occurred in July and the next is scheduled for October. Both policymakers and private sector economists are on alert for possible second-round effects on prices.

Annual inflation, excluding volatile items such as electricity, is already speeding up.

“We believe that headline inflation in Chile could continue rising, pushed up by the modest albeit unexpected hike in core inflation,” Leonardo Suarez, research director at LarrainVial, wrote in a note.

‘Economic Roller-Coaster’

Financial markets will seek insight on recent data that points in opposite directions, prompting Credicorp Capital analysts Daniel Velandia and Samuel Carrasco to describe Chile as “an economic roller-coaster” in a Sept. 2 report.

Industry and services helped to drive economic growth of 4.2% in July compared with the year earlier. That came after GDP contracted 0.6% in the second quarter versus the prior three months, with investment slumping 8.7% year over year.

Velandia and Carrasco expect Chile’s monetary authority to respond to weaker-than-expected investment and consumption by reducing the range for projected GDP growth this year in Wednesday’s report.

--With assistance from Giovanna Serafim.