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Monetary Policy Shift: Chile’s Central Bank Slashes Interest Rate Amid Easing Inflation

Chile's

Chile’s central bank made a significant move on Friday, cutting its benchmark interest rate by 100 basis points to 10.25% in a unanimous decision. The bank’s action was driven by the observation that inflation has been easing at a faster pace than anticipated.
The annual inflation rate in Chile, the world’s largest copper producer, has been falling more rapidly than expected for several months. In June, it dropped to 7.6%, down from 8.7% the previous month and a peak of 14% in August 2022.

The central bank stated, “Headline and core inflation have fallen faster than what was expected in the last Monetary Policy Report.”
This interest rate cut comes after the central bank had previously increased the key interest rate by a significant 1,075 basis points between July 2021 and October 2022 in an effort to combat soaring inflation. The rate was held steady at its cycle-high of 11.25% until the expected reduction on Friday.

Regionally, Uruguay had already taken the lead by implementing a 25-basis-point cut in April and a 50-basis-point cut to 10.75% in July. In August, there are expectations that Brazil, being the largest economy in the region, will initiate a process of lowering its interest rates. This move is anticipated to be part of the country’s economic measures.

In their statement, the central bank mentioned that the reduction in monetary policy has commenced based on the “consolidation of the inflationary convergence process.”

Interest Rate Surprise: Traders React to 100-Basis-Point Cut

The decision to cut the interest rate by 100 basis points surprised some traders who had expected a 75-basis-point reduction to 10.5%. However, the bank clarified that the rate reduction process will be guided by the “macroeconomic scenario and its implications for the trajectory of inflation.”

Jorge Selaive, the chief economist of Scotiabank Chile, described the cut as “aggressive” on the messaging platform X (formerly known as Twitter). He believes that the central bank is proactively taking measures to stay ahead of potential economic challenges. Selaive expects the interest rate to be at most 7.5% by December.

The prospect of the interest rate cut positively impacted the local stock market, which surpassed the 6,000-point milestone for the first time in mid-July and has since achieved all-time highs on multiple occasions.

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