Chile Central Bank Policymaker Sees Good Omens After Long Inflation Fight

Luis Felipe Cespedes, board member of the Central Bank of Chile, speaks during an interview at the bank headquarters in Santiago, Chile Photo by Cristobal Olivares /Photographer: Cristobal Olivares

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(Bloomberg) — Chile’s central bank sees a set of factors coming together that will help bring inflation back down to target early in 2026, board member Luis Felipe Cespedes said in an interview.

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Core inflation is slower than estimates from earlier this year, and salary growth is expected to moderate gradually, Cespedes said from the bank’s headquarters in downtown Santiago. In fact, consumer prices would be at the 3% goal already if it weren’t for electricity tariff hikes over the past year, he said.

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The government hiked electricity bills starting in July 2024 after freezing them for five years following a wave of social unrest. Those increases added about 145 basis points to annual inflation, Cespedes said, leaving price growth at 4.4% in the 12 months through May. Core inflation, which excludes energy and other volatile items, was 3.6%, compared with the central bank’s March forecast of 4% for the second quarter.

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“It’s a good indication the monetary policy dose that has implemented in general terms has been adequate,” said Cespedes, who has held a seat on the bank’s five-member board since 2022. “We have had a monetary policy trajectory that’s done its job.”

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With inflation looking increasingly under control, traders surveyed by the central bank in early June expect policymakers to cut the key rate by 50 basis points to 4.5% by year end.

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On Hold

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Central bankers have kept the key rate unchanged at 5% so far this year, first citing risks of price pressures from factors like the electricity hikes, and then warning of uncertainties surrounding global trade and geopolitical tensions. 

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Investors are now alert for a resumption of easing after policymakers said this month that borrowing costs will fall toward their neutral level — which they estimate at between 3.5% and 4.5% — in coming quarters as long as their outlook materializes.

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Cespedes’ conviction is significant given Chile’s inflation has run above 3% since 2021, reaching a three-decade high of 14.1% in 2022. In the last four years, the economy has been battered by a series of global and local price shocks including billions of dollars in stimulus at the end of the pandemic, as well as higher commodity costs following Russia’s invasion of Ukraine.

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His view also sets Chile apart from regional peers like Mexico and Brazil, which are countries where investors see inflation above their respective 3% targets both this year and next.

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Federal Reserve

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Policymakers’ inflation fight has been aided by the peso, which has gained roughly 7% year-to-date, helping to keep a lid on import costs. 

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Still, Chile buys much of its fuels abroad, meaning the danger of higher oil prices due to Middle East tensions risks spurring more inflation locally.