MNI INTERVIEW: Chile Likely To Resume Easing Cycle - Ceballos

The Central Bank of Chile is likely to resume its easing cycle at its next meeting with a 25-basis-point cut to 4.75%, as the interest rate remains above estimates of neutral, former senior economist Luis Ceballos told MNI.

"June inflation came in negative and below expectations, and domestic financial conditions have held up well despite global uncertainty. These factors align with the more accommodative tone in the June monetary policy report, which supports the case for a 25bp cut at the upcoming meeting," Ceballos, now a professor at the University of San Diego, said in an interview.

Chile's central bank kept the monetary policy rate unchanged at 5.00% last month, as expected. The decision was unanimous and was the fourth consecutive hold, though with a more dovish tone.

"I believe holding the policy rate at 5.00% was the right decision. While core inflationary pressures have eased and June CPI surprised to the downside, there is still considerable external uncertainty, particularly from renewed tariff threats and geopolitical tensions," Ceballos noted.

"That said, surveys and asset prices suggest markets had anticipated the pause, viewing it as temporary rather than a shift away from the easing cycle," he added. (See MNI INTERVIEW: No BCB Shift After U.S. 50% Tariffs - Volpon)

EXTERNAL UNCERTAINTIES

Some analysts have suggested that external uncertainties could delay the next rate cut until September. "I don’t fully agree with that view. While global risks persist, the domestic data supports further easing," Ceballos said.

He mentioned that the June monetary policy report reaffirmed a baseline scenario of rates gradually falling to support activity and guide inflation toward the target.

The former central bank economist noted that stronger-than-expected economic activity offers the central bank a bit more flexibility, but it does not fundamentally change the medium-term disinflationary trajectory. "The board will likely proceed with gradual cuts, keeping an eye on labor market dynamics and core inflation trends."

FED MOVES

If the Federal Reserve delays rate cuts or signals a higher-for-longer stance, it could tighten global financial conditions, leading to capital outflows from emerging markets and depreciating the local currency, according to Ceballos.

"In that case, the Central Bank of Chile might adopt a more cautious pace of easing to avoid pass-through effects on inflation. However, if the Fed starts its easing cycle later this year — as currently expected — this would open more space for Chile to lower rates without triggering financial instability," he said.

He added that Latin American currencies have performed well despite external uncertainties amid U.S. President Donald Trump's volatile trade policy, mostly because many central banks in the region, including Chile’s, acted early and aggressively to tackle inflation, which boosted credibility and investor confidence.

"Global risk sentiment has improved as markets anticipate monetary easing by major central banks. In addition, terms of trade have remained relatively stable, supported by commodity prices," Ceballos said.