The Board of the Central Bank of Chile decided to cut the monetary policy interest rate by 100bps to 10.25%. The decision was unanimous and considered dovish compared to expectations of a 75bps rate cut. Inflation has been falling faster than expected, while growth has held up in-line with the forecasts made at the June meeting. This provided ammunition to Chile’s central bank to be the first-mover and kickstart a rate-cut cycle to reverse the massive rate hikes it had to undertake during the pandemic which brought the interest rates from just 0.2% in mid-2021 to 11.25% in late 2022. The central bank has been on hold since then, potentially waiting for the Fed to give a clear pause signal, which happened at the July FOMC meeting where a clear data-dependent approach was adopted while not committing to any further rate hikes.
Other emerging markets could get a signal
The move from Chile’s central bank is likely to signal the start of a broad emerging market (EM) easing cycle, with Brazil set to follow suit this week as it meets on Wednesday and Peru, Mexico and Columbia also set to follow suit. Brazil’s Selic rate is currently at 13.75%, having rise from a low of 2% at end-2020. Brazil’s rate hike cycle has been the steepest globally, providing the most room for easing over the next two years. Meanwhile, inflation has dropped to 3.2% YoY in July from a peak of over 12% YoY last year.