It is the first rate cut by the Central Bank of Chile since October 2014 and follows the shift to an easing bias by the central bank board's in December.
The central bank noted that Chile's inflation rate fell to an unexpectedly low rate of 2.7 percent in December, the lowest since November 2013, from 2.9 percent in November, adding that inflation projections for the coming months remain in the lower part of the bank's tolerance range.
The central bank targets inflation of 3.0 percent, plus/minus 2 percentage points.
In its December monetary policy report the central bank trimmed its end-2017 inflation forecast to 2.9 percent from 3.1 percent, with inflation expected to remain at the lower end of the target range for most of this year before returning to 3 percent by the end of the year.
Economic activity in Chile is weak, the central bank said, affecting other sectors than just natural resources while demand-side indicators continue to grow at a similar pace as in recent quarters.
In December the central bank lowered its forecast for 2017 economic growth to 1.5 - 2.5 percent from a previous 1.75 - 2.75 percent. For 2016 it estimated growth of 1.5 percent, the slowest annual rate since 2009.
In the third quarter Chile's Gross Domestic Product expanded by an annual rate of 1.6 percent, the same as in the second quarter.
The Central Bank of Chile issued the following statement:
Internationally, global financial conditions have improved and emerging economies’ asset prices have risen. The prices of copper and oil, beyond ups and downs, have remained above those of mid-2016. Activity indicators confirm improvements in the developed world and a weakening in Latin America.
At home, the CPI posted an unexpectedly low monthly variation, resulting in a 2.7% increase for the year. Inflation expectations at the end of the projection horizon are near target, although for the coming months they remain in the lower part of the tolerance range. Again, activity showed weak figures, this time concentrating in sectors other than natural resources. All in all, demand-side indicators continue to grow at a similar pace of previous quarters. The labor market continues along previous trends. Long-term interest rates returned to their pre-US-election levels.
As was said in the last Monetary Policy Report, the Board estimates that, if the recent trends of the economic scenario persist, and so do their implications on the mediumterm inflation outlook, it will be necessary to boost the monetary impulse. At the same time, it reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the policy horizon."