• Reduces 2016 GDP growth forecast to 2%-3% from 2.5%-3.5%
  • Central bank sees inflation converging to goal in 4Q 2017

Chile´s central bank slashed its growth forecast for next year as the world’s biggest copper exporter struggles with falling commodity prices.

Gross domestic product will grow between 2 percent and 3 percent next year, less than the previous estimate of 2.5 percent to 3.5 percent, the bank said in its quarterly monetary policy report released in Santiago on Monday. The inflation forecast for 2016 was raised to 3.8 percent from 3.7 percent.

“There is a greater than anticipated deterioration in the natural resources sectors, especially mining, because of production cuts amid falling copper prices,” policy makers said. “The growth revision is explained mainly because of the deterioration of the external scenario.”

It is the seventh time the bank has cut its growth forecasts since March 2013 as increased government spending and loose monetary policy fail to revive demand. GDP will expand 2.1 percent in 2015, accelerating from 1.9 percent last year, the bank said.

Rates will follow a similar trajectory to current market expectations, the report said. Policy makers last week raised interest rates for the second time this year on the expectation that inflation is set to accelerate out of the central bank’s target range as a slowdown in November proves a brief respite.

Investment will increase 1.7 percent next year, below the previous estimate of 1.9 percent, while consumer demand gains 2.7 percent, the bank said. In 2015, investment will rise 0.7 percent, from a previous estimate of -1.2 percent.

Monetary policy will remain expansive, the bank said in the report, and fiscal policy will continue adding to spending growth, though with less intensity than 2015.

Weak growth and low interest rates have pushed the peso down 12 percent against the dollar in the past 12 months, boosting the cost of imports and fueling inflation. The previous scenario has intensified, with greater inflationary pressures in the short-term that ease in the mid-term, the bank said.

“Beyond the consistent depreciation of the peso, the persistence of high levels of inflation is also related to capacity breaches that, even if they have increased, are of a lower magnitude compared to other cycles of low growth,” it said in the report.

The central bank’s base case is that consumer prices will remain above 4 percent during much of 2016, ending the year within the target range and slowing to the 3 percent target toward the fourth quarter of 2017. Inflation, excluding food and fuel, will reach 3.7 percent by year-end 2016, faster than the previous 3.5 percent forecast.

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

“The board raised the benchmark interest rate to 3.5 percent and it future trajectory considers gradual adjustments to ensure the convergence of inflation with the target,” the bank said.

Risks for inflation are balanced whereas the risks to activity are weighted to the downside, the bank said.

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