MNI INTERVIEW: Chile To Cut Rates Twice Next Year - Ceballos

The Central Bank of Chile is likely to deliver two more 25-basis-point cuts next year, taking its interest rate to 4%, slightly below the neutral level estimated by the board at 4.25%, its former senior economist Luis Ceballos told MNI, adding that an improving inflation outlook open more room for further easing.

"I expect two additional 25-basis-point rate cuts over the course of 2026. This would bring the policy rate to around 4% by the end of the year, slightly below its estimated neutral level. In terms of timing, my view is that the BCCh will hold rates at the next meeting and resume easing during the first and second quarters of 2026," Ceballos, now a professor at the University of San Diego, said in an interview.

The estimated neutral policy rate was revised upward by 25 basis points to 4.25% relative to the third quarter 2024 assessment, he noted.

The council of Chile's central bank decided unanimously to cut its monetary policy rate by 25 basis points to 4.50% this week and said inflation has fallen faster than projected in September in a local and global economic environment somewhat better than expected.

The former central bank economist sees several developments that support further monetary easing. (See MNI INTERVIEW: Chile Nears Easing Cycle End - Ex-Deputy Garcia)

"The Central Bank of Chile revised its 2026 growth outlook upward to a range of 2% to 3%, supported by stronger investment dynamics. At the same time, inflation is now expected to converge to the 3% target earlier than previously anticipated, by the first quarter of 2026, with lower projected core inflation throughout the year," he said.

He also emphasized the tone of the central bank’s communication, which no longer warns about significant inflationary pressures.

PRESITENTIAL ELECTIONS

The right-wing winner of this month’s presidential elections Jose Antonio Kast has promised to cut spending and has a pro market agenda, but Ceballos said much has still to be revealed.

"So far, I think the president-elect has outlined broad ideas rather than a detailed and concrete policy agenda. While there is discussion about shrinking the size of the state and pursuing tighter fiscal discipline, the specific measures remain unclear," he said.

Political polarization could complicate the legislative process and make implementation of structural reforms more difficult, he noted.

"In terms of monetary policy, I do not expect a direct impact from the new government’s agenda, as policy decisions should remain anchored to inflation expectations, which so far appear well contained."

EXTERNAL RISKS EASE

In his view, external risks have eased meaningfully, supported by improved terms of trade, stronger global growth, and less restrictive global financial conditions.

"In this environment, the main factor that could justify a more stimulative monetary stance would be a very contractionary fiscal policy. However, this is not part of the central bank’s current baseline scenario, and therefore I do not see an aggressive shift toward stimulus as the most likely outcome," he noted.

While U.S. trade policy under President Donald Trump initially created significant uncertainty regarding its inflationary impact, those concerns have largely diminished, he said.

"Looking ahead, if the Federal Reserve delivers deeper or faster rate cuts than currently priced by markets, this would give the Central Bank of Chile additional room to reduce its policy rate," Ceballos concluded.