The Central Bank of Chile's board unanimously left its rate steady at 1.75 percent after cutting it three times this year by a total of 125 basis points following cuts in June, September and October.
"In accordance to achieving the inflation target, and in the context of increased fiscal impulse and forex intervention, the Board foresees that the monetary policy rate will be kept at its current level over the coming months," the central bank said.
Chile's peso and Chilean assets have tumbled since mid-October following the outbreak of massive protests over inequality. The peso jumped 2 percent in response to the central bank's decision to maintain rates to 787.8 per U.S. dollar.
But compared to the start of this year it is still down 12 percent.
Prior to the start of protests, which have included the death of more than 20 people and the injury of more than 13,000, the peso was trading around 716 to the dollar and it then fell 16 percent by late November but has begun rising again in recent days.
Starting on Monday the central bank began selling $200 million each day, and placing another $200 million in the forwards market, in an intervention that is scheduled to run through May 29, 2020 to curb volatility in the exchange rate, which the central bank today deemed as "excessive."
The central bank was frank in its assessment of the damages from the protests, saying economic activity and demand has been affected negatively and growth expectations for this year and next year have worsened, with growth now significantly worse than expected until mid-October.
Chile's inflation rate rose to 2.5 percent in October from 2.1 percent in September and the central bank said the markets are now expected inflation will rise to over 3.0 percent by the end of the year, reflecting the sharp appreciation of the peso.
On the other hand, widening capacity gaps will hold back inflation and the central bank said it was still too early to determine which of these two factors would dominate.
On Dec. 5 the central bank will release its latest forecast and analysis that supports today's policy decision.
The Central Bank of Chile issued the following statement:
"At its Monetary Policy Meeting, the Board of the Central Bank of Chile decided to keep the monetary policy interest rate at 1.75%. The decision was adopted by the unanimous vote of all the Board members.
In the external scenario, developments relating to the trade war between the United States and China continue to influence the behavior of global activity and financial markets, which adds to the impact of idiosyncratic factors on Latin America’s worsened performance. Activity and trade have been in line with expectations. In this context, monetary policy has remained expansionary around the world and stock market indices have risen in the main economies. Despite ups and downs, long-term interest rates and the multilateral dollar are virtually unchanged from the previous Meeting, as are the prices of copper and oil.
Locally, the social outbreak has prompted significant changes in various economic sectors and the financial markets, giving way to increased uncertainty. This has resulted in a greater perception of country risk, a deterioration of stock market indicators and increases in fixed-income rates and corporate spreads. The Bank has taken various measures aimed at enhancing market liquidity and mitigating volatility in key financial prices. The peso posted a significant depreciation that, beyond the level reached by the exchange rate, occurred amid a rapid succession of movements in the same direction that resulted in volatility, which was deemed excessive. In this context, the Board announced an intervention program in the forex market that started on 2 December, which has succeeded in bringing said volatility down. Credit conditions have also been affected, as evidenced by a special poll under the Bank Credit Survey that reports lower demand for credit in some sectors and more stringent supply for persons and companies.
Activity and demand have been affected negatively and growth expectations for this year and next have worsened, pointing at significantly lower rates than were foreseen up until mid-October. The labor market is already showing signs of deterioration, as reflected in various sources of information. Meanwhile, household and business confidence indicators has fallen sharply. In this context, the Government announced a package of reactivation measures that entails a major increase in fiscal spending in 2020.
In October, annual inflation was 2.5% and market expectations are that it will close the year at or slightly above 3%, reflecting the sharp depreciation of the peso. Two years ahead, the various expectations measures place it at 3%. The path of inflation in the monetary policy horizon will be determined by two key factors. On one hand, lower inflationary pressures deriving from widened capacity gaps and, on the other, cost push pressures above those previously considered, in particular because of the idiosyncratic nature of the recent peso depreciation. The uncertainty that surrounds the future evolution of the macroeconomic scenario is higher than normal, so it is still premature to figure out which of these two factors will dominate.
In accordance to achieving the inflation target, and in a context of increased fiscal impulse and forex intervention, the Board foresees that the monetary policy rate will be kept at its current level over the coming months. The Board reaffirms its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% in the two-year horizon.
The December Monetary Policy Report containing the forecasts and analyses that back the decision of the Board will be released tomorrow, Thursday 5 December at 8:30 hours.
The minutes from this monetary policy meeting will be published at 8:30 hours of Thursday 19 December 2019. The next monetary policy meeting will be held on Tuesday 28 and Wednesday 29 January 2020, and the statement thereof will be published at 18:00 hours of this latter date."
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