Chile Policy Makers See Bleaker Outlook for Growth and Inflation

  • Central bank cuts 2015 GDP growth forecast to 2% to 2.5%
  • Policy makers raise 2015 inflation estimate to 4.6% from 3.4%

Chile´s central bank forecast slower growth and faster inflation than previously estimated for this year, highlighting the dilemma facing a country with the most expansive monetary policy in the Americas.

Gross domestic product will rise 2 percent to 2.5 percent, compared with a previous estimate of 2.25 percent to 3.25 percent, the bank said in its quarterly monetary policy report released in Santiago Tuesday. The inflation forecast was raised to 4.6 percent from 3.4 percent.

Policy makers discussed the possibility of raising interest rates last month for the first time since May 2012 as inflation remained above the target range for a 16th month. Chile currently has the lowest real interest rates in the Americas as the central bank tries to revive growth in an economy hit by a slump in copper prices.

“Second quarter data showed a greater weakness in activity and demand, while business and consumer confidence expectations deteriorated again,” policy makers said in the report. The bank “expects growth to be less than anticipated in the second half.”

It is the sixth time the bank has cut its growth estimate since March 2013 as increased government spending and loose monetary policy fail to revive demand. GDP will expand 2.5 percent to 3.5 percent in 2016, the bank forecast.

Investment will fall 1.2 percent this year, compared with the previous estimate for an increase of 0.7 percent, policy makers said. In 2016, investment will rise 1.9 percent.

The central bank has kept its benchmark rate at 3 percent since October 2014. The rate is 1.6 percentage points below inflation, compared with 0.3 point in Peru and close to zero in Colombia. In Mexico, the key rate is 0.3 point above inflation and in Brazil the differential is 4.7 points.

Inflation Risks

Low interest rates and weak growth have pushed the peso down 15 percent against the dollar in the past 12 months, raising the cost of imports and fueling inflation.

“Inflation will continue above the tolerance range, at least during the first half of 2016,” policy makers said in the report. “Then consumer-price growth will return to 3 percent in the course of 2017, fluctuating near that value until the third quarter.”

The persistence of high inflation represents a risk to expectations, while the external scenario could cause an additional depreciation of the peso, the report said.

Still, inflation expectations for the two years ahead remain anchored at 3 percent, according to the central bank’s monthly poll of analysts, easing pressure on policy makers to raise rates.

Rates will have a similar trajectory to current market expectations, the report said.

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