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American Focus > Blog > Economy > Chile Holds Interest Rate at 5% in First Easing Pause Since July
Economy

Chile Holds Interest Rate at 5% in First Easing Pause Since July

Last updated: January 29, 2025 7:33 pm
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Chile’s Central Bank Holds Interest Rates Amid Rising Inflation Risks

Chile’s central bank recently announced its decision to keep borrowing costs steady at 5%, pausing its cycle of interest rate cuts. The central bank emphasized the heightened uncertainty in both domestic and global markets, as well as the risks posed by inflation. The unanimous decision by policymakers, led by Rosanna Costa, aligns with the expectations of analysts in a Bloomberg survey.

In a statement accompanying the rate decision, the board highlighted factors driving inflation dynamics, including a weaker peso, higher labor costs, and increased electricity tariffs. The central bank acknowledged the increased inflation risks and emphasized the need for caution in their approach to monetary policy.

While the previous statement hinted at potential rate cuts in the coming quarters, the latest communique was more open-ended. It stated that the board will evaluate future rate movements based on the macroeconomic scenario’s evolution and its implications for inflation convergence.

Chilean central bankers are adopting a more cautious stance as they navigate a period of heightened inflation. Wages and electricity costs are on the rise, while the depreciating peso is making imports more expensive. Despite these challenges, economic activity is showing signs of gradual improvement.

Florencia Ricci, head of Economy and Markets at Banchile Inversiones, noted the central bank’s signal of increased inflation risks and its avoidance of giving clear indications of future rate movements. Market reaction to the rate hold and hawkish statement was reflected in a rise in swap rates on the one-year contract.

Chile’s decision comes ahead of the Federal Reserve’s expected pause in its easing cycle, amidst global economic unpredictability. The central bank’s statement highlighted the volatility in global financial markets, influenced by the change in the US government and other sources of uncertainty.

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Locally, inflation accelerated to 4.5% in December, with projections of remaining near 5% in early 2025. Central bankers acknowledged traders’ expectations of prices exceeding the target in the next two years. While economic growth remains uneven, data suggests better-than-expected activity in the fourth quarter.

Looking ahead, analysts anticipate a 2.1% expansion in GDP for 2025. The central bank’s statement leaves room for a potentially more hawkish stance, acknowledging the uncertainty surrounding long-term inflation expectations. With short-term inflation surprises or further depreciation of the exchange rate, analysts may begin to consider the possibility of rate increases.

In conclusion, Chile’s central bank’s decision reflects a cautious approach in light of rising inflation risks and global economic uncertainties. The evolving macroeconomic scenario will continue to guide future monetary policy decisions as policymakers strive to maintain stability in the face of economic challenges.

TAGGED:ChileeasingHoldsinterestJulyPauserate
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