(Bloomberg) -- Chile’s central bank President Rosanna Costa is pushing back against bets that policymakers will start a series of steep interest rate cuts in April.

Inflation remains “extraordinarily high” and the bank needs more time to ensure it’s slowing toward the target before it can ease monetary policy, Costa said in a Bloomberg Television interview, after policymakers decided Thursday to hold rates unchanged at 11.25% for a second straight meeting. 

“As long as we don’t have greater clarity regarding whether inflation’s convergence to target is effectively taking place, the key rate will be maintained steady,” Costa, 65, said in Santiago. “We have inflation that’s extraordinarily high and it’s important to have that prior diagnosis before changing the bias in policy.”

Costa is commanding monetary policy in one of Latin America’s richest economies that overheated after billions of dollars in stimulus injected during the pandemic sparked a consumption frenzy, pushing inflation to over 14% by mid-last year. 

As a consequence, Chile’s central bank was one of the first in the region to tighten policy, embarking on a bold cycle that added a total of 10.75 percentage points to borrowing costs before signaling a pause in October as consumer price gains peaked. By contrast, many regional peers including Mexico, Peru and Colombia are still raising their rates as they struggle against above-target consumer prices.

The timing of possible rate cuts is now one of the main challenges of central banks across the globe, with Chile’s approach suggesting high borrowing costs may stay on for longer until inflation clearly shows a downward path.

CHILE REACT: Gradual Macro Adjustment Risks Delaying Rate Cuts

Higher copper prices from the loosening of Covid-19 restrictions in China — Chile’s top trading partner — together with lower local consumption after aggressive fiscal stimulus at the start of the pandemic are two of the main factors that the central bank is monitoring to understand the evolution of inflation, Costa, the nation’s first female central bank chief, said.

Cold Water

Costa’s words during the interview throw cold water over investor expectations that policymakers will kick off the region’s first easing cycle at their next meeting on April 4 after having raised rates to the highest in over two decades. While activity is weakening, annual inflation slowing to 12.8% is still over four times the target level and isn’t expected to hit the 3% target until 2024.

“When that day arrives, we are going to let financial markets know,” Costa said regarding an eventual easing cycle. “We are going to tell them the reasons that are generating greater certainty in inflation’s convergence to target.”

Both traders and economists surveyed by the bank before Thursday’s rate decision bet Chile will start to lower rates with a half-point reduction, amid views that the economic downturn will deepen and consumer price pressures will wane. Analysts at local financial services company LarrainVial said that a first cut of 150-200 basis points was possible. 

Chile’s interest-rate swaps curve jumped after Costa’s comments as traders weighed the odds of a later start to borrowing cost reductions. The one-year rate rose by 20 basis points, the biggest increase since Dec. 7.

Aside from consumption, cost-of-living rises have been fanned in recent months by higher fuel and commodity prices, leading the central bank board to keep a cautious approach.

Costa, who has been a central bank board member since 2017, has herself been increasingly outspoken regarding consumer price risks. In a December event in Santiago’s financial district, she warned that Chile’s cost-of-living increases were still too high, efforts to tame consumption were incomplete and the process of slowing inflation to target needed consolidation.

“We are waiting for a macroeconomic outlook that gives us confidence about the slowdown in inflation,” she added during the interview. “We are communicating what we are waiting for with great clarity.”

Stronger Currency

Going forward, Chile’s inflation fight will get a boost from the peso, which has gained 18% in the past three months, easing the cost of imports. At the same time, analysts surveyed by Bloomberg expect a dismal year for the local economy, which is forecast to shrink 1%, further damping price pressures.

“The appreciation has a short-term effect that can help” to tame prices, Costa said.

Still, the central bank chief said it’s crucial that Chile’s overall public policies contribute to efforts against inflation. In that sense, she warned that the event of more early pension fund withdrawals on top of the roughly $50 billion injected into the economy in prior rounds would be “extraordinarily harmful” due to the pressure they would put on consumer prices and capital markets.

“The effects on the economy are important, complicated, complex and very significant,” she said.

Costa is one of the most-respected Chilean economic authorities. Prior to joining the central bank board, she was the National Budget Director at the Finance Ministry.

She holds a bachelor’s degree in business administration from Pontificia Universidad Catolica de Chile, where she has also taught economics classes.

Other Key Interview Takeaways

  • The diverse inflation and economic outlooks between different Latin American countries mean any push to create a common currency would face great difficulties.
  • Chile’s central bank maintains a floating exchange rate and does not target a specific level for the peso.
  • The central bank is comfortable with its current level of international reserves.

(Updates with market reaction in 11th paragraph)

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