Chile cut its benchmark interest rate a quarter point for the sixth time since October, saying that growth was slowing more than expected as an investment slump spread to consumer spending.
Policy makers, led by bank President Rodrigo Vergara, reduced the key rate to 3.5 percent yesterday, as forecast by 21 of 22 economists surveyed by Bloomberg. One analyst predicted a half-point cut.
Chile’s economy grew less than economists expected in June for the fourth consecutive month, expanding 0.8 percent from a year earlier, the smallest increase since the aftermath of an earthquake in February 2010. While growth has slowed, the bank highlighted in yesterday’s statement that unemployment remains low and that nominal wage growth had accelerated.
“They’ve maintained the same bias, which was very surprising,” said Felipe Alarcon, chief economist at EuroAmerica in Santiago. “I thought they would be more dovish. The monetary policy report in September will be the guide for what they are going to do in the next few months.”
The key rate will fall to 3 percent by year end, according to a survey of economists released by the central bank Aug. 12. Analysts cut their growth forecast for this year to 2.5 percent from 2.9 percent a month earlier and 4 percent in January.
Inflation forecasts may be starting to fall. Traders surveyed by the central bank this month expect inflation to ease to 2.9 percent in two years, the first time the estimate has fallen below the 3 percent target rate since December, even as the peso tumbles and price-growth accelerates in the short term.
“We don’t see upwards risks to inflation in the future because we don’t expect significant pass-through from imported inflation,” said Sebastian Senzacqua, an economist at Bice Inversiones in Santiago. The peso is unlikely to repeat its sharp declines of earlier this year, he said.
The inflation rate rose to 4.5 percent in July from 4.3 percent the month before, in line with analyst expectations.
The peso has dropped 12.7 percent against the dollar since the start of October, the second-worst performance among emerging markets after the Argentine peso, pushing up import costs.
Weak growth may continue after imports of capital goods, a measure of investment in the economy, slumped 36 percent in July from the year earlier, the biggest decline this year, the central bank said last week.
“Local economic indicators show that the pace of expansion of output and demand has slowed more sharply than expected,” policy makers said yesterday. “The drop in investment has been compounded by a more marked slowdown in private consumption.”
Economic growth has slowed from 4.1 percent last year and 5.4 percent in 2012 as an investment boom in the mining industry comes to an end. Investment fell 5 percent in the first quarter from the year earlier after slumping 12.3 percent in the previous three months.
The downturn is spreading to consumer demand. Retail sales climbed 2.3 percent in June from the year earlier, the second-slowest pace since 2009.
The jobless rate increased to 6.5 percent in the three months through June from 5.7 percent in December and 6.2 percent the year earlier. Still, wages climbed 6.6 percent in the 12 months to June, up from 6.5 percent the month before.
Growth has remained sluggish or fallen across Latin America. Peru cut its key rate to 3.75 percent in July and Mexico reduced its rate to 3 percent in June as economic growth disappoints.
In Chile, policy makers on June 16 cut their growth forecast for this year for the third consecutive quarter to between 2.5 percent and 3.5 percent from a previous estimate of 3 percent to 4 percent. They cited a continued slowdown in activity, weaker consumer demand and a drop in investment, which a cyclical decline in the mining industry didn’t fully explain.