• Consumer prices fell 0.5% on month, rose 3.9% on year in Dec.
  • Central bank has said inflation ‘clearly’ easing to 3% target

Chilean consumer prices unexpectedly posted their biggest monthly drop in more than a decade in December, sending swap rates tumbling and paving the way for more sharp interest rate cuts.

Prices fell 0.5% last month, more than all estimates in a Bloomberg survey that had a -0.1% median forecast. Annual inflation eased to 3.9%, the national statistics agency reported on Monday. A closely-watched price gauge that excludes volatile items increased 5.4% in the year through December.

Chile’s central bank has signaled it will deliver another big rate cut at its Jan. 31 meeting, with policymakers saying inflation is “clearly” easing toward the 3% target. While the cost of living had risen more than expected in November, board members attributed the surprise to volatile items. More broadly, they are getting help from weak consumer demand and sluggish economic growth.

What Bloomberg Economics Says

“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.”

 Felipe Hernandez, Latin America economist

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Two-year swap rates, a measure of future monetary policy expectations, tumbled as much as 24 basis points Monday to 4.97%, the lowest level since November 2021, as traders weighed odds the central bank will accelerate rate cuts following last month’s drop of 75 basis points.

The peso declined as much as 1.4% in morning trading, the biggest decline among major emerging-market currencies tracked by Bloomberg.

Catch Up

“Inflation is coming back down and monetary policy is behind the curve,” Jorge Selaive, chief economist at Scotiabank Chile, wrote on X, the social media platform formerly known as Twitter. “There is still time for it to catch up.”

Selaive said the central bank should consider a reduction of between 75 and 125 basis points at this month’s meeting.

The monthly drop in consumer prices in December was the biggest since April 2013, with declines in 10 of the 12 categories of goods and services tracked by the national statistics agency. Food and non-alcoholic beverages fell 0.8%, while recreation and culture tumbled 2.8% and transportation fell 0.4%.

On the other hand, restaurants and hotel costs gained 0.8%, with the increase coinciding with the start of the peak travel period.

The annual inflation rate has now tumbled over ten percentage points from the three-decade high of 14.1% recorded in August, 2022. That decline has paved the way for an easing cycle that’s so far lowered the key rate to 8.25% from 11.25%.

Chile was one of the first Latin American nations to unwind aggressive borrowing cost hikes implemented in the wake of the pandemic. Most recently, Colombia delivered its first rate cut since 2020 last month, and Mexico is expected to follow suit between the first and second quarter.

Chile’s economic growth stagnated last year as demand and investment fell, according to central bank projections published in December. Policymakers see the economy expanding as much as 2.25% this year.

“December 2023 inflation came well below the central bank’s central scenario, which assumed 4.5% for the year-end,” JPMorgan economist Diego Pereira wrote in a research note. “The gap thus opens the door for the Board to contemplate the possibility to accelerate again the easing pace to 100 basis points.”

Written by: — With assistance from Giovanna Serafim @Bloomberg

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