Chile's central bank left its monetary policy rate at 2.50 percent but said inflation was expected to fall below expectations in the short term and the board will pay special attention to this risk "as it could require adjusting the policy rate."
The Central Bank of Chile, which has already cut its rate four times this year by a total of 100 basis points, added the recent decline in inflation could delay the convergence of inflation to the bank's target within the two-year horizon.
Chile's inflation rate fell to 1.5 percent in September from 1.9 percent in August for the lowest rate since October 2013 as food prices dropped.
The central bank, which targets inflation of 3.0 percent, plus/minus 1 percentage point, described September's inflation rate as "surprisingly low," and while short-term expectations had declined significantly, there were only limited changes to long-term expectations.
Chile's peso has risen sharply since May and was trading at 624.7 to the U.S. dollar today, up 7.1 percent since the start of this year.
Economic data for the third quarter of this year show activity and demand in line with the bank's latest monetary policy report, with the improved performance of the consumer sector standing out as compared with investment-related activities, the bank said, adding that expectations are becoming less pessimistic.
In September the central bank narrowed its 2017 growth forecast to 1.25-1.75 percent from 1.0-1.75 percent and raised its forecast for domestic demand to 2.6 percent from 2.5 percent.
Chile's Gross Domestic Product expanded by 0.7 percent in the second quarter from the first quarter for annual growth of 0.9 percent, up from 0.1 percent in the first quarter.
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 2.5%.
On the external front, global activity and prospects brought no big news, and the signs
of stronger dynamism remain. Global financial conditions remain favorable. The main
development of the month was the increase in some commodity prices, especially
copper and oil.
On the domestic front, September’s CPI inflation was surprisingly low, pulling its y-o-y
change to 1.5%. While inflation expectations at shorter terms declined significantly, at
longer terms they saw limited adjustments. Third-quarter data at hand show activity
and demand behaving in line with the latest Monetary Policy Report’s baseline
scenario, and the better performance of consumer-related sectors relative to
investment-related ones continues to stand out. The behavior of private consumption
reflects the evolution of the labor market and expectations becoming less pessimistic.
Activity figures made available after the September Report are consistent with the
baseline scenario and the monetary impulse depicted therein. However, incoming
inflation figures point to it falling short of expectations in the short term. This could
delay its convergence to the target within the two-year horizon. The Board will pay
special attention to this risk—already identified in the Report—as it could require
adjusting the policy rate. At the same time, the Board reiterates its commitment to
conduct monetary policy with flexibility, so that projected inflation stands at 3% over
the two-year horizon."
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