Tuesday, November 18, 2014

Chile holds rate, repeats change depends on inflation

    Chile's central bank maintained its monetary policy rate at 3.0 percent, as expected, and confirmed its guidance from last month that future changes would depend on the impact of economic conditions on inflation.
    The Central Bank of Chile, which has cut its rate by 200 basis points since October 2013, most recently last month, to counter an economic slowdown, said domestic demand and employment still point to a sluggish economy but local financing conditions are reflecting the monetary stimulus.
     The central bank admitted that a jump in October inflation was a significant surprise and inflation is likely to remain above the upper limit of its tolerance range for some months due to transitory factors. But expectations for medium-term inflation remain around 3 percent.
    Chile's headline inflation in October rose to 5.7 percent, the highest since January 2009, and up from 4.9 percent in September. The central bank targets annual inflation of 2-4 percent.
    On Oct. 23, Rodrigo Vergara, president of the central bank, said he didn't envisage more rate cuts as the economy was poised to pick up and inflation at a five-year high.
     Chile's economy has been slowing since the fourth quarter of last year, with the annual growth rate falling to a 5-year low of 0.8 percent in the third quarter from 1.9 percent in the third as both fixed investments and domestic demand declined.

    But compared with the second quarter, Chile's Gross Domestic Product expanded by 0.4 percent following a quarterly contraction of 0.1 percent in the second quarter.
    This brought accumulated growth in the first nine months of this year to 1.8 percent, according to the central bank, which has forecast 2014 growth of 1.8 percent, down from 2013's growth of 4.1 percent.

    The Central Bank of Chile issued the following statement:

"In its monthly monetary policy meeting, the Board of the Central Bank of Chile decided to keep the monetary policy interest rate at 3% (annual).
Internationally, recent information confirms the outlook of good economic performance in the United States and slower growth and low inflation in the Eurozone and Japan, a development that has widened the differences in the monetary policy implemented by those economies. External financial conditions tended to normalize during the month, but new outbreaks of volatility cannot be ruled out. Growth forecasts for emerging Asia have been revised down slightly, while for Latin America weak performance is confirmed in the larger part of the region. The price of oil dropped again, while the price of copper has been fairly stable.
Output, demand, and employment indicators continue to reveal the low dynamism of the Chilean economy. Local financial conditions reflect the impact of the monetary stimulus. October’s inflation was significantly higher than expected, at 5.7% y-o-y. The most likely scenario assumes that inflation will stay above the upper bound of the tolerance range still for some months. This surprise in inflation may be linked primarily to one-off temporary factors. The evolution of prices will continue to be monitored with special attention. Medium-term inflation expectations have remained around 3%.
The Board reiterates its commitment to conduct monetary policy with flexibility so that projected inflation stands at 3% over the policy horizon. Any future changes in the monetary policy rate will depend on the implications of domestic and external macroeconomic conditions on the inflationary outlook." 



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