Chile Central Bank Vice President Says Policy Outlook Is Unaltered by Currency Drop

Matthew Boesler and Matthew Malinowski
·3-min read

(Bloomberg) -- Chile’s central bank sees its policy outlook largely unchanged by a drop in the peso and the potential inflation impact from recent devastating floods, the institution’s vice president said in an interview.

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Chile’s monetary easing, combined with doubts over the Chinese economy that’s a key buyer of the country’s commodities and hawkishness of the Federal Reserve have weighed on the currency, Pablo Garcia said from Jackson Hole, where central bankers gathered for a global symposium hosted by the Fed. Still, no development has been big enough to alter policymakers’ plan to lower rates to 7.75%-8% at year’s end from the current level of 10.25%, he said.

“So far, the news that we’ve had, both on the international scenario and domestic data, inflation, gyrations of the exchange rate, they don’t seem to paint a picture dramatically different from what we had in mind when we started the cuts in July,” Garcia, 53, said. The bank’s next rate decision is Sept. 5.

Chile is spearheading Latin America’s pivot toward rate cuts at a time when others including the Fed and European Central Bank are still weighing tightening. Policymakers lowered borrowing costs 100 basis points in July and financial markets are pricing in at least 5 percentage points of additional easing over the coming year. Still, some analysts are warning that headwinds including a weaker peso may hamper the inflation slowdown to the 3% target.

The peso dropped more than 8% between early July and last week before paring losses when the Finance Ministry said it will increase dollar sales. A weaker currency fans inflationary pressure by making imports costlier, and Chile is vulnerable given it buys crucial goods — including nearly all its fuel — from abroad.

Chile’s central bank is also in the middle of a push to boost its foreign currency reserves by 25%, adding $10 billion to its coffers through daily purchases of $40 million which have weighed on the currency.

The accumulation of reserves is “a structural measure” aimed to establish “an extra layer of safety in terms of our buffers in external liquidity that is very helpful if shocks happen,” Garcia said. “It’s appropriate that we continue this process.”

Floods

Last week, heavy rains brought flooding to areas of Chile known for fruit and vegetable output. President Gabriel Boric’s administration declared a state of catastrophe as downpours inundated crops and destroyed infrastructure.

The central bank is monitoring the impact that the floods may have on agriculture prices, though Garcia said any inflationary pressure will likely be transitory.

The downpours “might have an impact on inflation in the short run, but it’s unlikely that they will have a more persistent impact on the disinflation process that might imply a change in policy strategy,” he said.

Chile’s annual inflation has eased sharply from a peak over 14% in 2022, hitting 6.5% in July. A gauge of core prices that’s closely-watched by the central bank has slowed more gradually, rising 8.5% from a year prior.

An economist trained at Massachusetts Institute of Technology, Garcia has been a member of the central bank board since 2014. He cast a dissenting vote at policymakers’ June meeting, backing a rate cut while the majority voted in favor of keeping borrowing costs at an over two-decade high of 11.25%.

Before becoming a board member, Garcia served as Executive Director for the Southern Cone at the International Monetary Fund. He has also held other positions at the Chilean central bank, including Director of Research.

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