In its monthly meeting on Tuesday, the Board of the Banco Central de Chile decided to maintain interest rates at 2.5 percent. The last time the Board altered the interest rate was in May. At the start of 2017, the interest rate was 3.5 percent. The Board chose to lower the benchmark rate by 25 basis points on four occasions in the first half of the year.
In a press release, the Board pointed to several factors that influenced their decision, such as global economic trends, investment, and commodity prices. The most important factor, however, was inflation.
Unlike its South American neighbors Argentina and Venezuela, inflation remains low and under control in Chile. Annual inflation is expected to be 1.9 percent in 2017, slightly below the Central Bank’s inflation target of 2 to 4 percent.
Economic growth in Chile is expected to remain low in 2017. The International Monetary Fund predicts that the Chilean gross domestic product will grow by 1.4 percent this year and 2.5 percent in 2018.
Other countries in Latin America often must tighten monetary policy to rein in inflation at the expense of economic growth. Unlike many of its neighbors, Chile is in a position where it can use monetary policy to boost economic activity. However, any act of monetary stimulus would have to be carefully planned to keep inflation within the Central Bank’s target.
The IMF expects consumer prices to grow by 2.3 and 2.7 percent in 2017 and 2018, respectively. Overall inflation is expected to converge to around the Banco Central de Chile’s inflation target of 3 percent.
For its part, the Board of the Banco Central de Chile made its position clear in its recent press release: “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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