MNI INTERVIEW: Chile Easing Cycle Could See Pauses-Vice Gov.
MNI (BRASILIA) - The Central Bank of Chile will remain data-dependent as short-term inflation rises and pauses in the easing cycle cannot be ruled out, though weak internal demand is likely to call for the policy rate to continue to decline towards the neutral level, Vice Governor Stephany Griffith-Jones told MNI.
"The short-term inflation projection rises, but the weakness in internal demand, mainly on the consumption side, which we have observed and project will continue, leads us to maintain a forecast of falling inflation since the second half of 2025, and a declining monetary policy rate trajectory toward its neutral level, even though short-term movements need to be evaluated more cautiously," Griffith-Jones said in an interview.
"It depends on how the economy evolves, but there could also be pauses because we are already relatively closer to the neutral policy rate.”
RATES PATH
Griffith-Jones calculates that rates should decline to around the middle of the central bank’s range of estimates of neutral or to a level only very slightly higher, in line with the Central Bank’s projected corridor for future interest rates. (See MNI INTERVIEW: Latam Neutral Rates Stable Through Pandemic)
“If we take the average between the upper and the lower bound of that corridor published in December 2024, we could reach an average of 4.1% by the middle of 2026 and remain below 4.5% by the fourth quarter of 2025," the vice governor said, noting that the bank estimates a neutral rate range of 3.5% to 4.5%, with an average of 4%.
"It’s a normalization that’s likely to be somewhat more gradual than what we had considered before." (See MNI INTERVIEW: Chile Rate Cuts Should Resume- Ex-Deputy Garcia)
Last month, the BCCh’s board unanimously decided to cut its policy rate by 25 basis points to 5.00%. Annual inflation eased to 4.2% in November 2024, down from 4.7% the previous month, though still above the central bank's target of 3%.
HIGHER SHORT-TERM INFLATION
The board is concerned by short-term inflation partly driven by cost pressures linked to weakness of the peso and increases in salaries, the vice governor said. However, it still projects that inflation will return to 3% in the first quarter of 2026, due to somewhat weaker aggregate internal demand.
Chile has significant growth potential in the medium term, particularly due to its abundant resources crucial for the green transition, such as copper, lithium, and potential for green hydrogen, she said.
The vice governor noted that the board has not incorporated any impacts from U.S. President-elect Donald Trump's policies into its forecasts, but rather will wait to see which measures are implemented.
"We don’t want to incorporate policies from the new U.S. government yet because the new government hasn’t started. We followed closely everything that was said during the campaign — tariff hikes, the potential fiscal increase due to lower taxes — but currently no measures have yet been taken. We are very alert to monitor, but we haven’t incorporated it into our scenario yet," she said.
Likewise, Federal Reserve policy is a factor for the BCCh, but not an overriding one, she said.
"We know we have to take that into consideration. It is not decisive, but it is an element of our decision," she said.
CHINA GROWTH CONCERN
China’s declining growth rate is also a key consideration for Chile, Griffith-Jones said.
"For Chile, what happens with China’s growth is very important because it influences copper prices a great deal. China is not only our main customer of copper, but it also affects international price levels, due to its weight in total demand” she said.
"There is quite a bit of uncertainty at the international level. In fact, we see that international uncertainty is the biggest challenge we face, unlike other periods.”
(With assistance from Santi Pinol)