(Bloomberg) -- Chile's fixed-income market is still trembling after the central bank said it is considering cutting its benchmark interest rate.
Medium- and long-term maturities in both nominal and inflation-linked Chilean swap curves fell to record lows Tuesday, a day after central bank minutes showed policy makers debated easing monetary policy during their May 9 meeting.
They eventually decided to keep the key rate at 3%, as economic activity didn't accelerate and inflation expectations remained well anchored. Yet several board members said cutting the rate was worth considering as a “preventive action” due to current risks or as a “corrective action” if monetary policy had been less expansive than sought.
To read more: Venezuelan Diaspora Helps Chile's Central Bank Consider Rate Cut
Investors interpreted the minutes as a signal the central bank will keep the benchmark rate on hold or even lower it this year, a departure from the more hawkish message they have been sending since a hiking cycle started in October 2018. While Chile's economy grew faster than the global average in 2018, recent data has shown it is weaker than expected this year as the U.S.-China trade war weighs on the country's exports. Central banks around the globe have already begun shifting to a more dovish tone this year, and Chile also seems to be following suit.
Banco de Chile's head trader Sebastian Ide said the market is starting to adjust to the central bank's message and that a rate cut could happen this year if the bank cuts its forecasts for potential GDP or neutral interest rate, or if it sees a wider output gap. Those estimates could be updated in a quarterly monetary policy report due on June 10.
“The market is asking the central bank for validation through updated forecasts,” Ide said. “I would expect a return to higher prices” if that doesn't happen.
To contact the reporter on this story: Daniela Guzman in Santiago at dguzman26@bloomberg.net
To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Walter Brandimarte
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