Thursday, July 14, 2016

Chile holds rate, still sees need to normalize stance

    Chile's central bank left its policy rate steady at 3.5 percent but once again said it believes it has to continue to normalize its policy stance - a phrase used to signal monetary tightening - in order to ensure that inflation converges towards its target.
    But the Central Bank of Chile, which raised its rate twice last year by a total of 50 basis points, again added that significant deviations of inflation from this convergence could alter its path.
    Chile's inflation rate has been steady for the last three months at 4.2 percent though the central bank said it was "somewhat" higher than expected in June. Inflation expectations two years ahead remain at 3.0 percent.
    The central bank targets inflation at 3.0 percent, plus/minus 1 percentage point.
    As in recent months, the central bank said it would continue to monitor inflation and inflation expectations "with special attention."
    The central bank added that data for the second quarter showed limited economic growth, with confidence indices still at pessimistic levels and the labour market has continued to deteriorate while the peso has appreciated.
    Chile's Gross Domestic Product rose by 2 percent in the second quarter, up from 1.3 percent in the first quarter.
    After depreciating from May 2013 to mid-January this year, the peso has strengthened and was trading at 650.2 to the U.S. dollar today, up 8.9 percent this year.

    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 3.5%.

Internationally, the biggest news has been the limited effects of the UK referendum result. The world growth outlook has seen no significant changes and market expectations point towards more expansionary monetary policies in the developed economies. In this context, after an initial rise in volatility, preference for risk has increased, bringing down long-term interest rates and risk premiums, boosting stock markets and appreciating emerging countries’ currencies. Commodity prices continue to post mixed movements, where an increase in the price of copper stands out.

On the domestic front, June’s CPI variation was somewhat higher than expected, but its path is in line with the forecast in the Monetary Policy Report. Expected inflation two years ahead remains at 3%. The evolution of these variables will continue to be monitored with special attention. Second-quarter output and demand data confirm limited growth. Confidence indicators are still in pessimistic territory. The labor market continues to reflect a deterioration in comparison to early in the year. The peso has appreciated.

The Board estimates that, to ensure the convergence of inflation to the target, monetary policy will need to continue to normalize, at the pace that is implicit in the latest Monetary Policy Report’s baseline scenario. Nonetheless, a significant deviation of inflation’s convergence may change said pace. The Board reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the policy horizon."



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