Chile holds rates at 5% amid Middle East conflict, hints at cuts ahead

Chile’s central bank has held its key interest rate steady at 5 per cent, maintaining a cautious stance amid rising global instability, especially in the Middle East. But the central bank has also opened the door for future rate cuts, if external risks remain contained, as per Bloomberg.

The decision, announced late Tuesday, was in line with market expectations. Sixteen of 21 analysts in a Bloomberg survey forecast the pause, while five expected a 25-basis-point cut. It marked the third straight meeting with rates on hold after aggressive monetary tightening earlier.

Middle East conflict adds new risks

In a statement quoted by Bloomberg, policymakers led by Governor Rosanna Costa said inflationary pressures had receded and price risks had eased. However, the board warned that the Israel–Iran conflict had added a “new source of uncertainty” that could spill over into Chile’s economy, especially through higher energy prices.

“The escalation of the military conflict in the Middle East adds further uncertainty to this scenario,” the central bank said. “Its scope, development, and potential impacts on the global and local economies are unknown.”

If the bank’s baseline forecast holds, the policy rate “will be approaching its range of neutral values,” estimated between 3.5 and 4.5 per cent, the statement added.

Inflation slows, peso strengthens

Chile’s annual inflation slowed to 4.4 per cent in May, its lowest level since November 2023, easing from highs seen in the aftermath of the pandemic, as reported by Bloomberg. A stronger peso, up more than 5 per cent year-to-date, has helped reduce import-led price pressures—vital for a country that relies heavily on imported fuel.

Still, surging oil prices driven by tensions in the Middle East could derail this progress. “We anticipate the easing cycle to resume in July, but swings in the external backdrop could delay cuts until September,” said Andres Perez, Chief Economist for Latin America at Banco Itau, as quoted by Bloomberg.

Perez expects the easing cycle to conclude at 4 per cent by early 2026.

Growth recovering, but labour market lags

Chile’s economy expanded 0.6 per cent month-on-month in April, triple the pace forecast by analysts, according to Bloomberg. Growth was driven by mining and services, while inflation cooled. However, job creation remained weak, the central bank noted.

“There are factors that point to a greater boost in investment in the near future,” the board said, though the labour market “shows slow job creation.”

The Chilean government expects GDP to grow around 2.5 per cent this year. The central bank’s updated economic forecasts are expected in its Quarterly Monetary Policy Report due Wednesday.

What’s next?

The tone of the latest statement suggests more cuts are on the horizon. “The Central Bank of Chile becomes more explicit regarding the future rate path, anticipating cuts in the coming quarters,” said Florencia Ricci, Head of Economy and Markets at Banchile Inversiones, as per Bloomberg.

Ricci expects two rate cuts this year, in Q3 and Q4, taking the benchmark to 4.5 per cent by the end of 2025.

Despite holding steady for now, Chile’s central bank has signalled its willingness to resume easing but only if the impact of external shocks like the Middle East conflict remains limited. For now, caution reigns as Santiago watches the global stage.

(With inputs from the agencies)