MNI INTERVIEW: Chile Central Bank Nears End Of Cuts, May Pause

The Central Bank of Chile is nearing a potential pause in its easing cycle after slashing rates by 550 basis points from a July 2023 peak, with possibly no more than half a point of cuts remaining, former senior economist Luis Ceballos told MNI.

“The central bank is expected to take a cautious approach in its upcoming meeting," Ceballos, now a professor at the University of San Diego, said in an interview. "This cautious stance is reinforced by the macroeconomic situation, including higher copper prices driving investment and revised upward growth and inflation forecasts.”

The implicit real rate from market surveys suggests there may be room for additional rate cuts of 25 or 50 basis points on top of the steep easing of the past year, contingent on a less persistent impact of higher electricity prices on core inflation in the coming months, he said.

"Despite this significant reduction [in rates], various measures of the real rate, based on inflation and expectations extracted from the Financial Traders Survey, have declined to around 1.50%, which is at the upper bound of the central bank's neutral real range of 0.5% to 1.5%."

Last week, the central bank cut rates by 25 basis points to 5.75%, with one dissenting vote for a 50-basis-point reduction, and Ceballos said the accompanying statement indicated that policymakers considered that the majority of the adjustment has already taken place. (See MNI INTERVIEW: Chile Should Cut Rates Faster-De Gregorio)

"The current easing cycle is nearing its end, with potential pauses in rate cuts ahead," he said.

DYNAMIC ACTIVITY

Domestic activity has shown dynamism, particularly driven by the service sector, supported by a resilient labor market, Ceballos continued.

"Additionally, the boost in exports has benefited activities linked to the external sector. However, the construction sector remains a significant weak point, with activity levels still low," he said.

The steep cuts over the past year have lowered short-term loan rates for both businesses and consumers, Ceballos said, though he noted that this was not the case for all borrowers.

"Long-term yields have been influenced by pension fund withdrawals following the pandemic period, which has elevated corporate and mortgage credit costs, in a context of weakening demand for credit, particularly the search for investment funding by firms.”

LATIN AMERICA

While many central banks in Latin America have embarked on monetary easing to stimulate their economies, Ceballos said they are now running into persistent inflation, particularly in core and service sectors, and their language has turned cautious. (See MNI INTERVIEW: Latam Neutral Rates Stable Through Pandemic)

"The increasingly hawkish stance of the U.S. Federal Reserve is exerting further pressure on these economies. External financial conditions remain tight, particularly for emerging economies," he said. "Given these dynamics, it seems likely that this cautious approach will persist throughout the remainder of the year. Central banks are likely to continue monitoring inflation trends closely and adjust their policies as needed to maintain economic stability.”