Chile Inflation Slowdown Gains Steam, Juicing Interest Rate Cut Bets


Chile’s annual inflation eased more than expected in August, paving the way for further steep interest rate cuts, even as policymakers monitor the impact of a weaker peso and recent floods.

Consumer prices rose 5.3% from a year prior, less than the 5.6% median estimate of analysts in a Bloomberg survey. It was the lowest annual rate since September 2021. Monthly inflation stood at 0.1%, below all economist forecasts, the national statistics institute reported on Friday.

A closely-watched price gauge that excludes volatile items increased 7.4% in 12 months and fell 0.1% from July.

Chile’s inflation is extending its slide toward the 3% target, coming down from the peak of 14.1% hit last year. That slowdown has already allowed the central bank to deliver back-to-back rate cuts and signal that more reductions are coming. Still, economists warn of numerous price threats, including a weaker peso, wage increases and costlier food in the aftermath of recent floods.

What Bloomberg Economics Says

“The lower-than-expected August CPI result should consolidate inflation expectations that are already in line with the midpoint of the 3% +/- 1 percentage point target. The surprise gives policymakers more flexibility, but we still expect the central bank to cut interest rates by 75 basis points at each of the next two meetings in October and December and keep an easing bias.”

The peso slipped as much as 0.6% against the dollar in morning trading, hitting a new low for the year for the third time this week. Two-year swap rates, a measure of interest rate expectations, tumbled 18 basis points to 6.07%, their steepest decline since July.

Transportation costs fell 0.2% on the month in August, while household items declined 0.3%, according to the statistics agency. On the other hand, energy gained 1.6% and food and non-alcoholic beverages rose 0.3%.

“The inflation picture continues to improve in Chile, and the near-term outlook remains relatively benign,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a report. “This will allow policymakers to keep cutting interest rates at the current pace over the coming meetings.”

Inflation Expectations

Central bankers see inflation reaching 4.3% in December before slowing to 3% in the second half of next year, according to their quarterly monetary policy report published Wednesday. While both headline and core inflation readings continue to ease, services prices have been persistent, they wrote.

Policymakers also reiterated that borrowing costs will end the year at 7.75%-8%, below the current level of 9.5%. They cut rates by a full percentage point in July before slowing the pace to a 75-basis-point reduction this month.

Read more: Chile Slows Easing Pace and Eyes Rates About 8% in December

Traders polled by the central bank in August see annual inflation at 3% in two years and the key rate tumbling to 5% over the next 12 months.

Still, analysts have increasingly warned of short-term inflation pressure from a depreciated peso. A weaker currency fans price growth by making imports more expensive, and Chile is vulnerable given that it buys key goods —including the majority of its fuels — from abroad.

Consumer price growth in Latin American countries such as Mexico and Peru continued their gradual decline in August. On the other hand, annual inflation likely picked up last month in Brazil, largely due to comparisons to the year-ago period when a slew of tax cuts were implemented.

Source: Yahoo