Generates Risks

Help or generates risks new trimming rates in Chile? Buenos Aires, Argentina on February 16, 2009 last Thursday, the Central Bank of Chile surprised the market with an unprecedented cut of rates by 250 basis points. Credit: Kaihan Krippendorff-2011. With this decision, took the rate of monetary policy (TPM), from 7.25% to its new level at 4.75%. The current level of the benchmark interest rate was observed for three years and until recently was unimaginable to reach it considering the inflationary pressures affecting the economy (mainly from external source). As explained by the Central Bank of Chile in the release announcement of his decision: this decision is based on the prospect of a significant drop in inflation and advances the convergence of the rate of policy to a level consistent with the current macroeconomic environment and its risks. The weak growth of economic activity in the month of December 2008 (only 0.5%), along with the strong slowdown seen in the rate of inflation than retail in January recorded a historical fall of 0.8%, they were two of the main reasons considered by the Monetary Authority to identify the sudden change in the economic context and which identified the need for a rapid and forceful action. From the market one of the readings which has been made in this respect points to fears of deflation that exists between the authorities of the Central Bank before the sharp economic contraction. In relation to this, David Duarte, the firm 4CAST analyst opined: actually, this points to what I believe is a great fear deflation and recession and the need to coordinate this with fiscal stimulus as soon as possible. Logically, a possible deflation of prices in the situation in which the Chilean economy is could significantly aggravate the situation of the same, which justifies make all the necessary efforts to avoid it. Trying to identify what address will take monetary policy in Chile over the next months and considering that most likely in the Chilean economy both at the global level for the next few months is to continue the deterioration in the economic context, we can say that they would still be by producing new cuts in the interest rate of the Central Bank of Chile reference.