SANTIAGO: Chile's central bank on Thursday moved to ease monetary conditions as a global economic slowdown and Europe's financial crisis deters bank lending. The move meant an expected interest rate cut was now more likely, Finance Minister Felipe Larrain said.
The central bank said it was offering REPOs, or repurchase agreements, for a term of up to 91 days, as a temporary move to boost liquidity of the local peso, citing "increased tensions" in financial markets.
"This is a powerful program to increase liquidity in the market. I think it is a good announcement," Larrain told reporters.
Larrain said the measure would be an element the bank would factor into its decision making at next-month's monetary policy meeting, when traders widely see a rate cut.
The central bank has held its base interest rate at 5.25 percent for six consecutive months, but is expected to cut rates early next year as the global financial crisis hits the country's open and export-dependent economy.
Traders expect the bank to cut its key rate by 25 basis points in January to 5.0 percent, according to the median forecast in a central bank poll published on Wednesday.
"If you read the statement from the last meeting, there is a clear change in the bias of monetary policy," Larrain told reporters. "Undoubtedly, in these circumstances, the reading of that communique makes it more probable that there will be a rate cut."
He said however that the bank's REPO programme was independent from any eventual rate cut, and did not condition monetary policy decisions.
The REPO announcement came just days after the central bank wrapped up a $12 billion dollar foreign exchange intervention program aimed at curbing peso strength and boosting foreign reserves.
"Foreseeing that the central bank will cut its monetary policy rate, as can be deduced from recent reports from the body, the liquidity injection is being done at a floating rate, not a fixed one," said Ruben Catalan an analyst with the Bci Estudios brokerage.
In a report Monday, the bank said Chile's financial system was prepared to confront a more "restrictive" environment, and stress tests show banks are well positioned to face a scenario of slower economic growth.
Comments
Comments are closed for this article.