Chilean consumer prices took an unexpected plunge in December, marking the most significant monthly drop in over a decade and bolstering the central bank’s stance on imminent interest rate cuts. The 0.5% decline surpassed all estimates in a Bloomberg survey, where the median forecast anticipated only a 0.1% decrease. Annual inflation also moderated to 3.9%, as reported by the national statistics agency on Monday. A key inflation measure, excluding volatile items, showed a 5.4% increase in the year through December, down from the previous month’s 6%.
Chile’s central bank has indicated a forthcoming substantial rate cut at its January 31 meeting, emphasizing that inflation is steadily moving towards the 3% target. Despite an unexpected spike in the cost of living in November, attributed to volatile items, policymakers are benefiting from weak consumer demand and sluggish economic growth.
“The surprise in December should further reduce short-term inflation expectations. It increases the probability the central bank cuts interest rates by more than 75 basis points at its Jan. 31 monetary policy meeting. Risks from El Nino and persistent services inflation are still concerns.”
The peso experienced a notable decline, dropping as much as 1.4% in early Monday trading, marking the most substantial decrease among major emerging-market currencies tracked by Bloomberg.
In December, consumer prices saw their most significant monthly drop since April 2013, with declines observed in 10 out of the 12 categories of goods and services tracked by the national statistics agency. Food and non-alcoholic beverages fell by 0.8%, while recreation and culture recorded a substantial 2.8% decline, and transportation saw a 0.4% decrease.
Conversely, costs for restaurants and hotels rose by 0.8%, coinciding with the beginning of the peak travel period.
The annual inflation rate has now decreased by over ten percentage points from the three-decade high of 14.1% recorded in August 2022, paving the way for an easing cycle. This cycle has already reduced the key rate from 11.25% to 8.25%.
Chile, as one of the first Latin American nations to reverse aggressive interest rate hikes following the pandemic, joins the trend of easing monetary policies in the region. With Colombia’s recent rate cut last month and expectations of a similar move in Mexico between the first and second quarter, the economic landscape in Latin America is adjusting.
Despite economic stagnation in Chile last year, characterized by falling demand and investment, central bank projections indicate an anticipated economic expansion of up to 2.25% in the current year.
