The Central Bank of Chile recently carried out an unexpected and aggressive cut in its key interest rate, decreasing it by one percentage point to 10.25% per annum, in a unanimous vote.
The move outpaced analysts’ predictions, who had foreseen a reduction between 0.5 and 0.75 percentage points.
This marks the first change in the Chilean base interest rate since October 2022, ending a cycle that had seen the rate increase from 0.75% to 11.25% starting in July 2021.
In a statement from the central monetary authority of Chile, it was noted that the rate cut process commenced amidst the “consolidation of inflation convergence” towards the 3% per annum target. Consumer inflation in Chile had slowed to 7.6% in June.
Despite no major differences observed between the projections and the actual economic activity and demand, inflation has decreased faster than initially anticipated, the Chilean central bank reported.
With projected deflation, the committee estimates further rate cuts than previously expected.
However, the size and scope of these reductions will depend on macroeconomic developments and their impacts on inflation.
The statement also highlights a favorable international context, with declining inflation in several developed economies, including the United States.
However, the central banks in these countries have begun raising interest rates again, expecting to maintain them high for an extended period.
This scenario could diminish the positive external impact on the Chilean economy.
The monetary authority also pointed out the risk of rising grain prices due to the end of the grain agreement in the Black Sea ports.