MNI INTERVIEW: Chile Nears Easing Cycle End - Ex-Deputy Garcia

The Central Bank of Chile is likely close to ending its monetary easing cycle, as its policy rate is already very near the neutral level, former deputy governor Pablo Garcia told MNI.

Garcia, now a professor at Adolfo Ibanez University, said in an interview that it would not be surprising if the central bank revised its neutral rate estimate from around 4% to a higher level.

“In the [monetary policy] report they published, there is an implied cut in December, another one around the middle of next year, and another toward 2027. But to be transparent, I think this means we are very close to simply stopping the easing cycle,” he said.

Last week, the Central Bank of Chile unanimously decided to keep its interest rate at 4.75%, following a 25-basis-point cut in July. The board mentioned the persistence of core inflation and said it needs to gather more information before continuing to lower rates.

The Monetary Policy Report was published last Wednesday, a day after the rate decision. (See MNI INTERVIEW: Chile Easing Cycle Could See Pauses-Vice Gov.)

HIGHER NEUTRAL RATE

“It would not surprise me if, in the December report, they decide to estimate the neutral rate at 4.5% or 4.25%, and basically either stop or deliver one more cut. But we are already about to end the easing cycle,” the former deputy added.

The economy is growing at a rate above that which officials believe to be potential, while inflation remains above target, he said.

 “It doesn’t make much sense to believe they need to keep cutting down to 4%.”

The outlook for monetary policy will hinge on the fiscal stance of the next government, with Chile set to hold presidential elections in November, Garcia siad.

"There are elections coming up, and the big question is what will happen with the fiscal strategy. There are many announcements of spending cuts, and also many announcements of tax cuts, and as we know, tax cuts are much more popular than spending cuts."

He mentioned that the quarterly monetary policy report emphasized the labor market but did not address the potential level of GDP, which is possibly higher.

“They put a lot of emphasis on the labor market and none on discussing potential GDP, because neutral rates had to be higher.”

TRADE WAR

Garcia also noted that U.S. President Donald Trump's trade policy does not affect Chile much due to the country’s economic structure, as it is not integrated into the global manufacturing value chains that have been the focus of the trade war.

Regarding the next moves of the Federal Reserve, he said while this is clearly a factor the monetary cycles of Chile and the United States are independent, noting that the Chilean central bank cut rates in July while the Fed held.