Chile maintains rate and need to normalize to hit target

    Chile's central bank maintained its monetary policy rate at 3.50 percent and reiterated that it still needs to normalize its policy to ensure that inflation converges to its target.
    The Central Bank of Chile, which has maintained a tightening bias since its last rate hike in December 2015, added that the change in May inflation was smaller than expected and the annual rate was unchanged at 4.2 percent from April.
    The central bank has often said that it needs to be vigilant about pushing down inflation to its 2-4 percent target range and the tightening bias is consistent with this policy.
    Although inflation largely has remained above the bank's target for the last two years, inflationary expectations two years ahead still remain at 3.0 percent, the bank said.
    Earlier this month the central bank lowered the top end of its 2016 growth forecast and said today that partial data for the second quarter reflect limited growth, with confidence indicators still in pessimistic territory and salaried employment growing at a slow pace.
    Chile's economy grew by an annual 2.0 percent in the first quarter of this year, up from 1.3 percent in the previous quarter, and the bank forecasts growth for the full year of 1.25-2.0 percent.

   
    The Central Bank of Chile issued the following statement:
   
"In its monthly monetary policy meeting, the Board of the Central Bank of Chile decided to keep the monetary policy interest rate at 3.5%.

International financial markets remain volatile, very influenced by the upcoming referendum in the UK and the discussion around the Federal Reserve’s monetary policy decision. Long-term interest rates have dropped in the main economies. Globally, stock markets are down and the prices of many commodities have risen. Copper has been an exception. The dollar, with ups and downs, is near where it was last month. The world growth outlook presents no significant changes.

 On the domestic front, in May’s CPI variation was somewhat smaller than expected and y-o-y inflation remained at 4.2%. Expected inflation two years ahead remains at 3%. The evolution of these variables will continue to be monitored with special attention. Partial second-quarter output and demand data reflect limited growth. Confidence indicators are still in pessimistic territory, salaried employment is growing at a slow pace, the unemployment rate is still low and nominal wages have slowed.

The Board estimates that, to ensure the convergence of inflation to the target, monetary policy will need to continue to normalize, at the pace that is implicit in the latest Monetary Policy Report’s baseline scenario. Nonetheless, a significant deviation of inflation’s convergence may change said pace. The Board reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the policy horizon."

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