Chile cuts monetary policy interest rate to 6.5%

The Central Bank of Chile (BCCh) cut its monetary policy rate for the fifth consecutive time on April 2, reducing it by 75 basis points to 6.5%.

Inflation was 5% year on year in October 2023, decreasing to 3.8% by January 2024 and returning to 4.5% by the end of February.

The monetary policy rate reached a recent high of 11.25% in October 2022, and the central bank began cutting rates in July 2023. Since then, it has cut rates by 475 basis points.

The five-member board made the decision unanimously.

The BCCh said the consistently higher inflation was driven by the strong dollar and an increase in oil and copper prices.  The country is the world’s largest exporter of copper and second-largest exporter of lithium.

Compared with October, lithium exports fell by 43% in late 2023 while copper exports grew by 15%. The two converged in early 2024, but copper remains more stable.

The central bank pointed to an increase in short- and long-term lending rates, increased equities prices and a weaker peso when explaining the cut. Since the beginning of the year, the peso has depreciated by about 10% against the dollar, trading at 975 in April, compared with 879 at the beginning of the year. 

The BCCh also said that monetary policy transmission has been effective, with the previous rate cut in December reflected in lending rates, particularly commercial lending.

The central bank’s monthly indicator of economic activity, Imacec, rose 10% in December, followed by an identical decrease in January and February.

The BCCh also highlighted an increase in credit delinquencies.

The central bank pointed to lower domestic consumption and investment figures in the second half of 2023. It said monthly growth has since exceeded expectations as a result of supply factors and services.

Employment and labour participation continued to improve, with unemployment remaining above the historical average. Households and businesses remained pessimistic in their economic outlook but improved slightly.

Inflation in the first quarter of 2024 exceeded expectations while continuing its rapid decline, “standing closer to 3%”, the BCCh said. The monetary policy rate will be further reduced in line with the models and forecasting, it concluded.

Chile is recovering from a 2019 period of turmoil and peso volatility, when there were large street protests over the cost of living and inequality. That year, the central bank intervened heavily to stabilise the peso, pledging to sell $20 billion of its reserves, which at the time amounted to $40.5 billion.

In early 2020, the central bank paused the intervention programme after selling $4.5 billion. Chile received International Monetary Fund assistance worth around $24 billion during the Covid-19 pandemic.