This article originally appeared on CentralBankNews.info on October 18, 2018. It is reproduced here with permission from the author.
Chile’s central bank raised its monetary policy rate by 25 basis points to 2.75 percent, saying the “board believes that the monetary stimulus should begin to be reduced to ensure that inflation perspectives remain close to the target.”
It is the first rate hike by the Central Bank of Chile since December 2015 when the rate was raised to 3.50 percent to rein in inflation, boosted by the fall in the peso’s exchange rate.
Beginning in January 2017 the central bank then began cutting the rate as inflation eased and in four quick steps it sliced 100 basis points of the key rate, wrapping up its easing cycle by May 2017.
Since then the rate has been kept stable but beginning in June the board has been considering withdrawing monetary stimulus. Minutes from the September meeting showed committee members had considered raising the rate before deciding unanimously to maintain it.
Today’s decision, which was unanimous by the board, reflected the recent narrowing of the output gaps in recent quarters and the expectation that this will continue so inflation will be around 3.0 percent in coming quarters, the bank’s target.
The central bank said it expects the monetary policy rate to converge to its neutral level by 2020 and beginning this process in a timely manner would allow a tightening to be gradual and cautious.
Chile’s inflation rate rose to 3.1 percent in September from 2.6 percent in August, with investment in machinery and equipment continuing to boost domestic spending, with durable consumption also strong.
Business expectations are also optimistic while household expectations have ease in recent months and are below their neutral threshold, the central bank said.
Chile’s peso firmed steadily for two years beginning in January 2016 but since February this year it has depreciated, like most emerging market currencies.
In the last week the peso has risen as investors looked for tighter monetary policy and today the peso was trading at 676.2 to the U.S. dollar, down almost 9 percent this year.