Chile’s central bank cut borrowing costs for a fourth time in six months following the slowest economic growth in four years, while toning down the outlook for further reductions.
Policy makers, led by bank President Rodrigo Vergara, reduced the benchmark interest rate by a quarter-point to 4 percent yesterday, as forecast by 19 of 24 economists surveyed by Bloomberg. Four analysts expected the bank to keep rates unchanged and one forecast a half-point cut to 3.75 percent.
Chile’s economy expanded 1.4 percent in January from the year earlier, the slowest pace since the aftermath of a devastating earthquake in February 2010. While policy makers forecast growth of 3.75 percent to 4.75 percent this year, analysts surveyed by the bank estimate 3.7 percent. The bank said yesterday that further rate cuts would depend on economic developments, in contrast to its statement last month when it said they could be needed to meet the inflation target.
“The most relevant part is the easing bias, which in this case is less expansive than in previous meetings,” said Sebastian Senzacqua, an economist at BICE Inversiones in Santiago. There “could be a pause or an end in the easing cycle.”
Elsewhere in Latin America, Peruvian policy makers yesterday kept their benchmark rate at 4 percent for a fourth month on expectations inflation will ease from a 20-month high. Among the region’s five rate setting central banks, only Brazil’s has increased borrowing costs in the last year.
Manufacturing (CHIPMFGY) output has declined on an annual basis in five of the past six months, while unemployment rose to 6.1 percent in the three months through January from 5.7 percent the month earlier. The median estimate of analysts surveyed by Bloomberg was for a jobless rate of 5.8 percent.
“Activity and demand have grown below expectations, particularly in sectors related to investment,” policy makers said in their statement. “The board will evaluate the possibility of introducing further rate cuts according to the evolution of internal and external macroeconomic conditions.”
The outlook for growth deteriorated further this week when an unexpected drop in Chinese exports pushed copper prices to the lowest in almost four years. Chile is the world’s largest exporter of the metal, which accounts for more than half of its sales abroad.
Copper traded at $2.92 to the pound as of 4:20 p.m. in New York, down from $3.22 on March 6.
While economic growth is slowing, inflation is accelerating. Consumer prices increased 3.2 percent in February from the year earlier, the fastest pace in 22 months, as a decline in the peso pushed up import costs and rents jumped. The central bank targets inflation of 2 percent to 4 percent.
“A significant part of the pick-up in recent months is due to an external inflation transfer, which is a one time only event,” said Pablo Correa, chief economist at Banco Santander, referring to the drop in the peso. “This should not be incompatible with more rate cuts.”
The peso has declined 12 percent against the dollar in the past six months, the worst performance in emerging markets after the Argentine peso.
Still, inflation expectations for the next year remain at 3 percent, in line with the target, according to surveys of analysts and traders by the central bank this week.
“If inflation expectations continue to be anchored, the central bank will keep trying to revive the economy, possibly taking the rate to 3.75 percent,” Alberto Naudon, chief economist at Banco de Credito e Inversiones, said before the decision. “The key will be the evolution of inflation expectations, after this cut the central bank will pause and evaluate how they change.”
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