Chile’s central bank president drove home the institution’s hawkish message on Thursday, even as she recognized that the highest borrowing costs in more than two decades were set to slow stubborn core inflation.
(Bloomberg) — Chile’s central bank president drove home the institution’s hawkish message on Thursday, even as she recognized that the highest borrowing costs in more than two decades were set to slow stubborn core inflation.
Policymakers won’t cut rates until underlying inflation is on a clear downward trend, while consumption slows and the activity gap gets close to negative, Rosanna Costa told Bloomberg TV.
“We are worried about making hurried decisions and the fact that inflation and inflation expectations could bounce back,” Costa said while in Washington DC for the International Monetary Fund’s Spring Meetings. “That cost would be tremendously high.”
Swap rates have soared this month, as the market “understands very well” the central bank’s message on borrowing costs, Costa said. Many now expect policymakers to hold off on rate cuts until the third quarter, far later than the April reduction forecast at the beginning of the year.
Central bankers have left rates on hold at the last three meetings as inflation ticks down more gradually than expected. A key measure of core prices even accelerated last month. Put together, the monetary authority sees cost-of-living increases remaining above the 3% target until the end of 2024.
Chile was among the first economies in the region to tighten monetary policy as the pandemic wound down, in a rate hike cycle that added 10.75 percentage points to borrowing costs. Over the past two years, the nation has been hit by inflation shocks including billions of dollars in early pension withdrawals and a sharp jump in commodity prices following Russia’s invasion of Ukraine.
“Our economy is adjusting from levels that are unsustainable,” Costa said. “What we are doing is bringing it to more sustainable levels.”
Pushing Back
Costa, 65, is the nation’s first-ever female central bank head. She has been a central bank board member since 2017 and previously was the National Budget Director at the Finance Ministry.
The central bank’s decision to hold borrowing costs last week and a dip in inflation in March pushed real interest rates into positive territory for the first time since 2019.
Policymakers also raised estimates for year-end inflation to 4.6% from 3.6% last week, as well as forecasts for gross domestic product, further damping wagers that borrowing cost cuts may be imminent.
Domestic activity is showing mixed signs as tighter monetary policy kick ins. Analysts bet Chile will be one of the only major economies in the region to contract this year after barely exiting a recession in late 2022.
Chile’s economic activity fell more than expected in February on a drop in mining production, the central bank reported on April 3. Still, the prior month’s gain was revised to 1.6% from 0.5%.
In January, President Gabriel Boric put forth a $2 billion aid program, including increased cash transfers to the poor. His government is pushing an economic agenda including an overhaul of pensions, and is trying to revive efforts for tax reform after its initial proposal was rejected by congress.
While governments in other regional countries like Colombia and Brazil have criticized their central banks in recent months, in Chile “the role of the central bank and its autonomy has been supported,” Costa said.
“When you have inflation that’s at such a high level, the people suffer,” she said. “We have to do our work and have inflation converge to target.”
–With assistance from Eduardo Thomson.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.