Chile Holds Rate at 5.75% in Pause to Yearlong Easing Cycle
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Loading... - Akila Salah
- 02 Aug 2024
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In a move that surprised many, Chile's central bank decided to keep its key interest rate steady at 5.75%, interrupting its yearlong cycle of rate cuts. This decision comes amidst increasing inflation pressures and signals a temporary halt in the easing cycle.
Policymakers, led by Rosanna Costa, voted unanimously to hold the rate, a decision anticipated by only four out of 20 analysts surveyed by Bloomberg. The majority had predicted a quarter-point reduction. This pause comes after the central bank had reduced the interest rate by 550 basis points over the past year.
While Chile's economic growth showed signs of slowing after a strong start in 2024, rising energy prices are expected to push inflation further above the central bank's target. The bank has projected that inflation won't return to the 3% goal until 2026. The decision to hold the rate aligns with the bank's strategy to manage the key rate according to macroeconomic trends and their implications for inflation.
Chile's decision was announced shortly after the Federal Reserve in the United States chose to keep borrowing costs at their highest level in over two decades. Fed Chair Jerome Powell also indicated that a rate cut could be considered as soon as September.
The central bank of Chile revised its 2024 economic growth forecast to a range of 2.25% to 3% as of June 19. However, recent economic activity has declined for three consecutive months, following a period of better-than-expected performance earlier in the year.
A significant factor in the central bank's decision is the anticipated rise in the headline inflation rate. The central bank noted that the inflation rate will increase by 145 basis points over the next 12 months due to a rise in electricity tariffs, which had been frozen since 2019.
Chile's central bank's decision to hold the interest rate at 5.75% reflects a cautious approach in the face of rising inflation and economic uncertainties. This pause in the easing cycle is expected to be temporary, with future rate cuts dependent on ongoing macroeconomic trends and inflationary pressures.
FAQs
Why did Chile's central bank decide to hold the interest rate?
Chile's central bank held the interest rate at 5.75% to manage rising inflation pressures and align with macroeconomic trends, despite a yearlong easing cycle.
How has the interest rate changed in the past year?
Over the past year, Chile's central bank has reduced the interest rate by 550 basis points before pausing at 5.75%.
What is the projected economic growth for Chile in 2024?
The central bank has revised its 2024 economic growth forecast to between 2.25% and 3%.
What impact are rising energy prices having on inflation in Chile?
Rising energy prices, particularly due to increased electricity tariffs, are expected to lift the headline inflation rate by 145 basis points over the next 12 months.
How does Chile's central bank decision compare to the Federal Reserve's recent actions?
Chile's decision to hold the interest rate came just after the Federal Reserve kept borrowing costs at their highest level in over two decades, with potential rate cuts anticipated soon.
