(Bloomberg) -- Chile traders raised their interest rate forecast for December after the central bank delivered its second-straight borrowing cost reduction and warned of a volatile exchange rate.

Policymakers will lower borrowing costs to 8% by the end of the year from the current level of 9.5%, above the prior estimate of 7.75%, according to a survey published by the central bank on Tuesday. Rates will fall to 5.25% in 12 months, compared with the previous forecast of 5%.

Central bankers led by Rosanna Costa are relaxing monetary policy as activity weakens and annual inflation slows toward the 3% target. Still, in the minutes to their last meeting, board members warned of short-term volatility in the exchange rate. A weaker currency fans cost-of-living pressures by making imports more expensive, and the peso hit a year-to-date low on Monday.

Read more: Chile Central Bank Sees Rates Trending Down, Warns of Volatility

Traders in the survey see Chile’s annual inflation at 3.3% in 12 months and at 3% in two year’s time.

In a Sept. 13 interview, Chile Finance Minister Mario Marcel said the economy is stabilizing after shocks, and annual inflation will end the year at about 4%.

The monetary authority surprised investors with a bigger-than-expected rate cut of a full percentage point in July before delivering a reduction of 75 basis points this month. Elsewhere in Latin America, Brazil, Uruguay, Paraguay and Peru are also relaxing monetary policy.


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