Chile’s central bank adopted a more hawkish stance in its latest meeting, emphasising its commitment to controlling inflation and ensuring it reaches the target. In the minutes of its January 28 meeting, the bank expressed its readiness to take further action if needed to safeguard its inflation targets.
The central bank kept borrowing costs on hold at 5% during the meeting, marking the first pause in its easing cycle since July. The minutes referred to this decision as the “only plausible” option at the time, given the economic conditions.
Several board members voiced concerns over the evolution of two-year inflation expectations, noting that the central bank was prepared to take necessary actions if it believed inflation would jeopardise the target. This more cautious tone, following the release of the minutes, resulted in a rise in swap rates across the curve. The two-year rate increased by nearly 10 basis points to 5.41%, approaching its highest level since April of the previous year.
Chile’s central bank, under the leadership of Rosanna Costa, had implemented a series of rate cuts totalling 6.25 percentage points since mid-2023, responding to easing inflation from its three-decade high. However, inflation remains persistent due to factors like a weaker peso and rising electricity costs. Policymakers now project inflation will return to the 3% target by 2026.
The central bank’s minutes indicated that inflation’s trend indicators were still showing upward momentum, with projections for nearly 5% inflation annually in the first part of 2025. Despite this, the bank reaffirmed its commitment to acting decisively if inflation risks increased. One policymaker stressed that the bank would not hesitate to raise rates again if necessary to ensure the inflation target was met.
January data revealed inflation rose at its fastest pace in almost two years, with a 1.1% jump from December, driven largely by a significant rise in electricity costs. Costa has stated that inflation will likely hover near 5% in the first half of the year before beginning a gradual slowdown.
The Chilean peso weakened past 1,000 per dollar last month, contributing to inflation by making imports more expensive. However, the currency has since strengthened to its strongest level since November.
Chile’s decision to keep rates steady came just a day before the U.S. Federal Reserve paused its easing cycle. This, along with U.S. President Donald Trump’s plans for trade tariffs and tax cuts, suggests a stronger dollar globally.
The new tone from the central bank raises the possibility of future rate hikes, signalling that monetary policy could shift if inflationary pressures persist. The next policy rate meeting is set for March.
