Chile is expected to cut its benchmark interest rate on Friday, the first major Latin American economy to do so since a wave of hikes to contain surging post-pandemic inflation, in a likely sign of loosening monetary policy in the region.
Chile and most major Latin American economies hit decades-high inflation last year, leading to aggressive monetary policy tightening that might finally be reversing as price hikes have slowed across the region.
Yearly inflation in Chile, which saw one of the region’s biggest post-COVID price spikes, has dropped to 7.6% from a peak of 14% last August, and the central bank is expected to cut the rate by at least 75 basis points after holding it steady at 11.25% for nine months.
Uruguay has already led the charge regionally with a 25 basis points cut in April and a 50 basis point cut to 10.75% in July. Brazil, the region’s largest economy, is also expected to start cutting rates in August.
«This cut by (Chile’s central bank) will help test the waters and let us know what the market’s ‘mood’ is like,» said Andres Abadia, chief economist for Latin America for Pantheon Macroeconomics, adding that other countries will be watching how the local market and currency react. «We expect rate cuts in Brazil next week, and other countries will join this trend starting in October.»
The expected cut has already led to a rally with the local stock market hitting record highs after breaking the 6,000-point barrier for the first time in mid-July.
In a report, Scotiabank said it expected Chile’s central bank to weigh cuts of 50, 75 and 100 points «with a greater bias of 75bp as it would allow a return to unanimity (and) would be compatible with recent surprises.»
Such a cut would also «maintain the validity of the interest rate corridor,» or the system to guide interest rate decisions to the central bank’s inflation target, the bank said.
Cesar Guzman, manager of Macroeconomics at Grupo Security in Santiago, said he is betting on a reduction of 100 points since inflation has been falling faster than forecast by the Central Bank.
«Another factor to consider is that the market already has a large cut implicit in it,» Guzman said, adding that the current rate was «well above what is considered neutral.»
While inflation has dropped, the head of the Central Bank, Rosanna Costa, said earlier in July that the challenge of bringing inflation to the 3% target «is not over.»
«Although the latest inflation data was good, we must avoid drawing hasty conclusions,» said Arturo Claro, an economist at Econsult. Claro expects a cut of 75 points based on the central bank’s tendency for caution.
«After this first drop, you can pause and thus wait for clear evidence that core inflation, the best thermometer for price dynamics, is falling consistently,» Claro said.
Those doubtful about more aggressive cuts point to factors like the war in Ukraine that could lead to increases in the price of wheat and oil.