(Bloomberg) -- Chile’s central bank reiterated that its key interest rate will end December as low as 7.75% and fall further next year, while warning of volatility in the foreign exchange market, the minutes of its September policy meeting showed.
Policymakers considered a rate cut of 50, 75 or 100 basis points this month, before unanimously settling on an 75-point reduction to 9.5%, according to the minutes. The move was “fully consistent” with the bank’s general monetary policy stance, they wrote.
“This option, moreover, had the advantage that it reflected most market expectations, a point to bear in mind given the high sensitivity that the MPR expectations and the exchange rate had shown to developments related to interest rate differentials,” central bankers wrote.
Chilean central bankers led by Rosanna Costa are sticking with plans for swift easing while also monitoring inflation risks such as rising wages, higher costs of some commodities and a weakening peso. Headline price increases are running at less than half the pace of a year ago, while underlying inflation has slowed “somewhat” more than expected, they wrote. Both economists and traders see cost-of-living gains back at the 3% target within 24 months.
Read more: Chile Finance Chief Says Economy Is Stabilizing After Shocks
In the minutes, policymakers highlighted short-term volatility in the exchange rate and interest rates. They wrote that it was not unusual to see this kind of movement during times when borrowing costs were changed after a period of stability.
“It was suggested that another reason that could explain this short-term volatility was the fact that the Central Bank of Chile was one of the first to begin reducing its reference rate, with prospects that the reduction would continue in the future,” policymakers wrote. “In addition, the Fed’s rate hike had been quite aggressive, and doubts as to how this process would continue introduced an additional degree of sensitivity.”
Annual inflation slowed to 5.3% last month, a reading that was much lower than forecast. Still, in a local newspaper interview, Costa said part of the positive surprise from August’s report may be reversed in the near-term.
The peso hit a year-to-date low earlier in September and is down nearly 10% in the past three months. A weaker currency fans inflationary pressure by making imports more expensive, and Chile is particularly vulnerable given it buys much of its fuels from abroad.
Chile’s gross domestic product will shrink by 0.2% this year, according to economists surveyed by Bloomberg, the worst forecast in South America after Argentina. Growth is expected to bounce back to 2% in 2024.
Elsewhere in Latin America, Brazil, Peru and Paraguay have all reduced their borrowing costs in recent days.
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