Chile: Central Bank stays put in December amid plunging peso
At its 4 December monetary policy meeting, the board of the Central Bank of Chile (BCCh) unanimously decided to keep the key policy rate at 1.75%, after having delivered a 25-basis-point cut it in the previous meeting in October. The decision wrongfooted most analysts, who expected subsequent easing in response to the deteriorating economic backdrop.
With capital outflows pushing the peso to an-all time low in November, policymakers opted to keep the key policy rate unchanged in order to avoid a further deterioration of the currency, and hence an upswing in inflation. Country-wide protests have weighed heavily on economic activity since mid-October, while also hampering growth prospects as business and consumer sentiment plummeted to a historical low in November. Yet, with inflation jumping to 2.5% in October, the Bank deemed that the current rate provides sufficient stimulus to reach the 3.0% target in the near-term, while also supporting economic activity. In order to stabilize the currency, and thus inflation, on 28 November the Bank announced a USD 20 billion intervention through swap and repo operations between 2 December and 24 May 2020. Although the decision will erode the country’s USD 39.5 billion worth of foreign currency reserves, it is not clear whether it will stem the peso’s plunge.
Policymakers expect price pressures to surge ahead and thus noted that the key policy rate is likely to remain unchanged for the next few months. Inflation is now expected to raise above the 3.0% target in 2019 and 2020 as the depreciation of the peso stokes prices. Meanwhile, the additional fiscal stimulus contemplated in the 2020 budget was deemed sufficient by the Bank to support growth going forward. That said, heightened uncertainties stemming from protracted protests and the proposed rewriting of the constitution are likely to persist, and therefore will continue to affect the path of monetary policy ahead.
The next monetary policy meeting is scheduled for 28–29 January.