Following dovish comments by central bank President Jose De Gregorio, on August 24th, the USDCLP exchange rate rose by almost 0.1% to trade at 468.15 to the US dollar.  The move comes on the heels of last week’s central bank decision – to keep benchmark interest rates unchanged at 5.25%.  This is the second unchanged decision issued by the Banco Central de Chile after five straight increases.  And, these won’t be the last.

With growth prospects dimmer, monetary policymakers are now worried that the previous string of rate increases may actually be working – coupled with hints of a global slowdown.  Analysts’ estimates for the Latin American economy were optimistic in the beginning of the year.  For the first quarter, market experts were looking for a robust 10% rate of growth.  But, now, that rate of growth has slowed to 6.8% – with expectations of a thinner 5% in 2012.  The slower expansion rate has been tied to slower domestic demand, which helped to fuel the country’s accelerated growth in the first place.

With slower domestic demand cooling the first quarter’s rapid expansion, inflationary pressures have additionally come down.  This is the central factor as to why the BCC raised interest rates from the very beginning.  Since 2010, consumer prices have skyrocketed.  The country’s rate of inflation has risen from near zero percentages to above 3% in a matter of a little over 1.5 years – boosting central bank estimates of 4% price inflation at the end of 2011.

But, now consumer prices have declined, according to the National Statistics Agency.  July consumer prices rose by 2.9%, down from a pace of 3.4% in June.  Not surprising, this has caused policymakers to reconsider their own forecasts – revising them lower to 3.6% – and increasing the probability that there won’t be any further rate increases in the months to come.

Traders seem to agree as expectations for further tightening have decreased tremendously in the last several sessions.  Now, it seems that there is a growing sentiment that rates will move lower before they go higher.  Central bank rhetoric didn’t help the situation.  A quick scan of the released statements this month show that bank members dropped specific comments supporting tighter monetary policy.

If the trend continues – lower growth estimates and higher expectations of a rate cut – the USDCLP is likely to come under some buying pressure in the coming months.  All that’s left is to confirm a move higher in the USDCLP exchange rate above 475.00.  Such a move could confirm a technical turn in the currency pair, and prove that the Peso is ready for a bout of weakness against the greenback.