The Central Bank of Chile has lowered the interest rate by 25 basis points, bringing it down to 4.75% from 5%. This decision was unanimous among the bank’s board members. The bank is keeping an eye on global trade tensions and their effects on the international economy. They expect the interest rate to move towards a neutral level in the future.

Evaluating the Macroeconomic Environment

The board intends to closely assess the macroeconomic environment. This evaluation will help guide future decisions on the Monetary Policy Rate (MPR) to keep inflation in check with their target. We view the 25 basis point cut by the Central Bank of Chile as a strong indication for further easing. The drop to 4.75% was expected, so we are now focused on how quickly more cuts may occur. The bank’s statement about rates moving toward neutral values suggests that this easing cycle is ongoing. For currency traders, we believe the Chilean Peso will likely weaken against the dollar. Chile’s annual inflation recently dropped to 3.1% in June 2025, which gives the bank more room to focus on growth rather than inflation. With the US Federal Reserve maintaining rates around 5.25%, the increasing interest rate gap makes the USD/CLP pair appealing for upward moves.

Interest Rate Derivatives and Currency Volatility

The bank’s forward guidance encourages us to explore interest rate derivatives. We plan to benefit from upcoming lower rates, likely through interest rate swaps. Historically, easing cycles in Chile, like the one in 2019, have led to a steady drop in short-term government bond yields, a trend we expect will happen again. This easing should ideally boost Chilean equities, especially the S&P IPSA index. However, we are cautious due to the external risks highlighted by the bank. The recent 4% drop in copper prices, linked to weak manufacturing data from China, poses a significant challenge for Chile’s export-driven economy. With the conflicting forces of domestic policies and global uncertainties, we predict an increase in currency volatility. We are using options to express our viewpoint, as they allow for defined risk. Buying call options on the USD/CLP lets us gain from a weaker peso while limiting our potential loss to the premium paid. Create your live VT Markets account and start trading now.

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