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Chile Unexpectedly Cuts Key Rate for First Time in 21 Months

Santiago's Skyline
Chile's Inflation eased to 2 percent in September, the slowest pace in Latin America after Ecuador, while economic growth has weakened for three consecutive quarters. Photographer: Morten Andersen/Bloomberg

Oct. 17 (Bloomberg) -- Chile’s central bank unexpectedly cut its key interest rate by a quarter point for the first time in 21 months, citing slower economic growth and inflation and the weaker global outlook.

Policy makers, led by bank president Rodrigo Vergara, reduced the benchmark rate to 4.75 percent today, as forecast by two of 19 economists surveyed by Bloomberg. The other 17 analysts expected the bank to keep the rate on hold.

Inflation eased to 2 percent in September, the slowest pace in Latin America after Ecuador, while economic growth has weakened for three consecutive quarters. The slowdown led the central bank to cut its 2013 growth forecast last month to a range of 4 percent to 4.5 percent from 4 percent to 5 percent. With Chile’s benchmark rate at least 10 times the level in the U.S. and at the European Central Bank, and demand growth set to slow, traders were expecting a rate cut by year end.

“Economic activity has proceeded at a moderate pace,” in line with forecasts, the central bank said in a statement accompanying today’s decision. “Final demand has reduced its rate of expansion, although not as sharply as forecast.”

Signs of slower growth led policy makers to debate a rate cut at each of the previous five meetings, according to the minutes of discussions. Minutes from today’s meeting will be published Nov. 5.

Traders in the swaps market expected the central bank to leave its benchmark rate on hold at 5 percent today and cut it to 4.5 percent by December, according to Banco de Chile research.

‘Had to Happen’

“It had to happen,” said Alberto Naudon, chief economist at Banco de Credito & Inversiones in Santiago and one of the two analysts who forecast a cut. “The central bank made the right decision, especially in a context where inflation expectations were going slowly but consistently downwards.”

Analysts expect inflation to reach 2.8 percent in 11 months, according to a central bank survey released on Oct. 10, down from 2.9 percent the month before.

Gross domestic product could grow as little as 3.5 percent in 2014 as the country emerges from the “Disneyland” of high copper prices and low global borrowing costs, according to former central bank head Vittorio Corbo.

Slowing Down

“In the next few years, Chile will have to work hard in order to grow and even to maintain an expansion of 4.5 percent,” Corbo said in an interview on Oct. 4. “Everything points to one or two rate cuts in the next six to 12 months.”

Gonzalo Sanhueza, one of five members of the Monetary Policy Group of economists that makes recommendations on the key rate, said yesterday that he expects the benchmark rate will fall to 4 percent in 2014.

“The economy has slowed, growth between January and August has been less than 2 percent and all growth indicators in the margin are under 4 percent,” Sanhueza told a press conference. “Economic growth is under the potential rate”.

Inflation slowed to the lower end of the 2 percent to 4 percent central bank target range last month from 2.2 percent in August. Price increases haven’t risen above the mid-point of the target range all year.

“Subdued inflation for so long is one of the reasons we have an easing bias,” central bank director Joaquin Vial said in an interview on Oct. 11. Still, “subdued inflation is transitory and should accelerate to the central bank’s 3 percent target.”

To contact the reporter on this story: Javiera Quiroga in Santiago at jquiroga5@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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