Chile Central Bank Holds Key Rate at 4.5% as Fuel Price Shock Appears Contained

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(Bloomberg) — Chile’s central bank held its benchmark interest rate unchanged for the fourth straight meeting as economic activity flounders while the fallout of this year’s massive fuel cost hike remains limited.

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Board members led by Rosanna Costa kept borrowing costs steady at 4.5% late Tuesday, in line with the views of all analysts surveyed by Bloomberg. Policymakers last lowered rates in December before signaling plans for a “prolonged” hold as war in the Middle East stoked uncertainty.

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Chile central bankers stayed put after May’s consumer price data came in softer than expected, allaying fears that a late-March fuel hike would propel cost-of-living increases across the economy. At the same time, unemployment has risen to the highest level in nearly five years and activity has withered in recent months. Still, there’s reason for policymakers to stay cautious on inflation as President José Antonio Kast’s administration pushes pro-growth measures.

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“With core inflation still well behaved in May and domestic demand remaining soft amid weak activity and a subdued labor market, we believe the scenario remains consistent with an extended rate pause and a fully data‑dependent approach,” Andres Pardo, head of Latin America macro strategy at XP Investments, wrote in a note before the announcement.

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Consumer prices increased 0.2% last month compared to April, half of the median forecast from analysts surveyed by Bloomberg. Annual inflation unexpectedly slowed to 3.9%, closer to the 3% target.

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Energy prices jumped 1% on the month in May, while other product areas, including clothing, and food and non-alcoholic beverages, saw declines.

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The US and Iran subsequently reached an interim peace agreement to reopen the Strait of Hormuz, driving oil and gas costs lower. Chile imports nearly all its fuels, making its economy susceptible to swings in global prices.

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Chile’s economic activity rose just 0.1% in April, according to a June 1 central bank report, coming after gross domestic product shrank in the first quarter.

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Analysts surveyed this month by the central bank see annual inflation at 3% in two year’s time. Policymakers will publish their latest economic forecasts in their quarterly monetary policy report early on Wednesday.

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—With assistance from Giovanna Serafim.

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