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Chile: producer price inflation on retreat

Bank of Chile would continue its cycle of rate cuts

October 24, 2024 (Investorideas.com Newswire) Investorideas.com (www.investorideas.com), a go-to platform for big investing ideas releases market commentary from Quasar Elizundia, Expert Research Strategist at Pepperstone.

"Producer price inflation in Chile recorded its fourth consecutive reduction, slowing to 8.2% year-on-year in September from 9% the previous month. This is the mildest increase since February, driven by smaller hikes in manufacturing and energy generation costs. Although mining costs have shown a slight increase, this trend of slowing producer inflation could be positive for consumer inflation, which already showed signs of improvement in September, falling to 4.1% year-on-year.

This lower inflation scenario could allow the Central Bank of Chile (BCCh) to continue its rate-cutting cycle, as seen in the October meeting, where the rate was reduced by 25 basis points to 5.25%. The monetary authority appears willing to continue lowering borrowing costs, aiming to support economic activity without creating excessive inflationary pressures. The prospect of declining inflation should serve as an additional positive factor for the BCCh in future decisions.

However, leaving aside the favorable inflation context, the Chilean peso has shown a somewhat more favorable performance in recent sessions, thanks to the stabilization of downward pressure on copper prices. Nonetheless, the CLP could remain under pressure if copper prices fail to consolidate a better operational outlook and the strength of the dollar persists. With the Fed easing expectations of an aggressive rate hike cycle, the market has seen a rise in USD, which has negatively impacted emerging market currencies like the Chilean peso.

In this environment, the Chilean peso faces an interesting challenge: on the one hand, the benefits of lower inflation and interest rate cuts; on the other, the persistent pressure of a global environment where commodity prices and the strength of the dollar could limit the currency's recovery. It will be crucial to monitor the evolution of copper prices and Fed policy to understand the future direction of the CLP.

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