Chile’s Central Bank Cuts Rates to 5.50% Amid Growth Worries

• On September 3, 2024, policymakers at the Banco Central de Chile (BCCh – Chile Central Bank) unanimously voted to cut its monetary policy interest rate from 5.75% to 5.50%. The cut, which occurred despite a rebound in growth in July’s economic activity index for Chile, was mostly priced in by markets.
• The BCCh implied that with the U.S. Fed’s expected September cut, interest rate differentials are likely to become less of a concern in Chile, as other markets’ central banks also cut. The BCCh also emphasised its worries regarding a sluggish growth trajectory, especially after a weak Q2 2024 growth print.
• Strong economic growth in July (+1.0%, month-over-month; +4.2% year-over-year), which came on the back of disappointing Q2 growth (-0.6% quarter-over-quarter; 1.6% year-over-year) is seen by the BCCh as a one-off. However, given the moderated growth, Fitch Solutions has revised its GDP forecast from 2.7% to 2.5% recently, and the BCCh’s more dovish tone signals that more cuts are to come in the months ahead as ‘spending shows greater weakness.’
• Given the Central Bank’s rate-cut-rationale, economic growth concerns, Fitch has kept its end-of-2024 rate prediction at 5.00%, and its 2025 rate at 4.00%. The forecast from Fitch is based on its belief that the BCCh will prioritise stimulating growth through lowering borrowing costs rather than fighting a resurgence in inflation in the next few months.
• Risks to Fitch’s forecast are balanced and are heavily reliant on Chile’s economic growth trajectory for the next few months.  If growth trends well below projections of 2.3% next year, this will lead to more cuts, perhaps five in 2025, while stronger growth is more likely to lead to only three cuts in 2025.

(Source: Fitch Solutions)