Chilean Benchmark Central Bank Rate Kept at 5.25%

November 15, 2011

The Central Bank of Chile is better positioned than most central banks to handle a new downturn in global activity should the euro debt crisis evolve into such.  That is because Chile’s central bank raised the key interest rate by 475 basis points from 0.5% prior to June 2010 to 5.25% one year later.  Increases were implemented in 12 of 13 meetings, January 2011 being the exception.  Since mid-2011, policy has been on hold, making today’s meeting the fifth straight in which no change in the interest rate was announced.

A statement from officials is reasonably upbeat.  Domestic demand has lately been stronger than assumed, and the labor market is still tight.  While core inflation is contained and expected inflation decent, actual inflation of 3.7% now is the highest in 2-1/2 years.  So a case for cutting rates does not yet quite exist, but officials warn that “the persistence of problems in advanced economies could shape a more adverse external scenario than the one assumed in the Report’s baseline scenario, with potential consequences over growth and inflation in Chile, as well as for the orientation of monetary policy.”  Therefore, the direction of the next policy change seems more likely to be downward than upward.  Back in June, when the key rate was increased to 5.25% from 5.0%, it was widely presumed that more tightening would follow.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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