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Chile held its benchmark interest rate steady after the biggest protests in decades sent the currency to a record low, reviving inflation concerns even as the economy contracts.
The bank board, led by Mario Marcel, voted unanimously on Wednesday to keep borrowing costs at 1.75%, as expected by eight of the 18 economists in a Bloomberg survey. The other 10 forecast a quarter-point cut. Swap traders were pricing in less than a 50% chance of a rate cut.
Chile’s economy is reeling from more than six weeks of social revolt and rioting, sparked initially by a metro fare increase. The protests sunk the peso to a record low, prompting the central bank to promise as much as $20 billion in spot and swap operations to prop up the currency. An uptick in inflation expectations, as well as views that monetary policy is already expansive, prompted the central bank to hold rates even as activity suffers.
“If they had cut rates, it wouldn’t have been consistent with the inflation target or fiscal stimulus,” said Sebastian Diaz, an economist at Pacifico Research. “A more active position is neither imminent or necessary.”
Today’s rate decision was brought forward from Dec. 6, with policy makers saying they wanted to provide more “timely information” about the country’s economic situation following weeks of unrest.
Widespread discontent about the country’s social safety net have driven protests during which more than 20 people died and thousands were injured, including more than 2,000 police officers. President Sebastian Pinera at first responded by declaring a state of emergency and calling in troops, before quickly backtracking.
What Our Economist Says
Concerns about the potential impact from peso depreciation on inflation expectations were the main reason for the central bank to maintain interest rates. Policy makers preferred not cutting interest rates as it could undermine exchange rate intervention and efforts to reduce volatility.
--Felipe Hernandez, economist at Bloomberg Economics
Since then, the government has launched a series of measures including proposals aimed at boosting pensions and salaries for the poorest, as well as billions of dollars in fiscal stimulus to create jobs.
“They are worried about the exchange rate and to the extent that fiscal policy is hopefully going to reactivate some economic activity,” said Benito Berber, chief Latin American economist at Natixis North America LLC. “Cutting the rate would have made the depreciation pressure on the currency even stronger.’
Read More: Chile Government Unveils Stimulus Package as Economy Slumps
A 12.3% decline in the peso year-to-date has pushed up consumer price expectations, as did the series of announcements on new spending. The 12-month breakeven inflation in the swaps market rose to 3.2% today from 2.79% before the riots started.
Hawkish comments from Marcel had also fueled expectations the bank would hold. On Friday, he said monetary policy was already “significantly expansive” and that it should be consistent with exchange-rate policy and take into account changes in fiscal policy.
Consumer prices rose 2.5% in the 12 months through October. The central bank targets annual inflation of 3%.
Meanwhile, economic activity plummeted 5.4% in October from the month before, the biggest monthly decline since at least 1996. Retail sales in the same month slumped 12.1% year-on-year.
Despite the hit on growth, “cutting at this stage wouldn’t have made much sense,” said Rafael de la Fuente, chief economist for Latin America at UBS Group AG. “You’re not going to get much of a lift from easier financial conditions and you put additional pressure on the currency.”
(Adds comments from economists throughout)
--With assistance from Maria Jose Campano.
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