Chile holds rate, still mulling cuts despite inflation rise

    Chile's central bank maintained its policy rate at 4.0 percent but repeated that it "will consider the possibility of making additional cuts to the monetary policy rate" despite a rise in inflation, which the central bank assumes is temporary.
    The Central Bank of Chile, which cut its rate in March for the fourth time since October 2013 for a total reduction of 100 basis points, also repeated that "local economic indicators confirm the low dynamism of output and demand," with a drop in investment compounded by lower private consumption.
     Last month the central bank also provided the guidance that it would consider cutting rates further, but inflation has continued to accelerate.  Last week central bank President Rodrigo Vergara said a depreciation of the peso had added to a significant and surprising rise in inflation in recent months.
    While the central bank still maintains an easing bias, it added that "the board reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the policy horizon."
     Chile's inflation rate picked up to 4.7 percent in May, up from 4.3 percent, and the fourth consecutive month of rising prices.

     The central bank, which targets inflation of 3.0 percent, plus/minus one percentage point, in March revised upwards its forecast for inflation to end 2014 around 3.0 percent, with a temporary rise to between 3.5 and 4.0 percent. In 2013 inflation averaged 1.8 percent.
    "The most likely scenario assumes that the rise in inflation - associated with the peso depreciation, among other factors, is a temporary development, which will be monitored with special attention," the central bank said.
    Chile's peso depreciated in 2013 and continued to decline through early May. But since May 6 it has been rising, quoted at 553 today compared with 568 on May 5, a gain of 2.6 percent.
     The central bank added that information confirms the outlook for a recovery of the world's developed economies and forecast for moderate growth in emerging markets are maintained.
    Chile's Gross Domestic Product expanded by 0.7 percent in the first quarter from the previous quarter for annual growth of 2.6 percent, down from 2.7 percent. The unemployment rate eased to 6.11 percent in April form 6.45 percent in March.
    The central bank forecast in March that the economy would expand between 3.0 and 4.0 percent this year, down from 4.1 percent in 2013.

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