Chilean Central Bank continues interest rate cuts despite the peso decline

The Chilean Central Bank (CB) continues interest rate cuts despite the peso decline.

According to the institution’s vice president, Pablo García, the bank plans to maintain its monetary policy trajectory despite the potential inflationary impact of recent devastating floods.

The CB plans to reduce interest rates from 10.25% to 7.75-8% by year-end.

He noted that current international and domestic data do not indicate a significantly different scenario from what was expected when rate cuts started in July.

Although the market anticipates at least 5 more percentage points of cuts within a year, some analysts warn that a weak peso could obstruct the inflation easing towards the 3% target.

The peso depreciated over 8% from early July until the Finance Ministry increased dollar sales last week.

This depreciation fuels inflationary pressure by making imports costlier, impacting Chile severely as it imports all its fuel.

Recent heavy rains caused flooding in regions known for fruit and vegetable production, leading President Gabriel Boric to declare a state of catastrophe.

García stated that flood-related inflationary pressure would likely be temporary and not affect the broader disinflation process or monetary policy strategy.

Annual inflation in Chile decreased significantly from over 14% in 2022 to 6.5% in July, with core inflation gradually slowing to 8.5%.