Chile’s Economic Woes Deepen as Tightening Bias Questioned

  • June unemployment rate rose to highest in almost five years
  • Industrial production down for the third consecutive month

Chile’s economic woes deepened in June as unemployment rose and industrial production tumbled, adding to speculation that central bank will remove its tightening bias on monetary policy. Ten-year government bond yields fell the most in six months.

The jobless rate climbed to 6.9 percent in the three-months through June from 6.8 percent in the month-earlier period and from 6.5 percent the year before, according to the national statistics institute, in line with the medium estimate of economists polled by Bloomberg. Industrial production fell 3.8 percent in June from the year earlier, the third consecutive decline and compared with the 0.5 percent drop forecast by analysts.

Chile is enduring its third year of sluggish economic growth, with little sign of the gradual pick-up long forecast by the government. Now, rising unemployment may be starting to weigh on consumer spending, with retail sales rising less than forecast in June. As the economic news disappointed, the central bank indicated it may remove its tightening bias in the minutes of its July 14 meeting released today.

"The fate of the tightening bias is sealed," said Nathan Pincheira, an economist at BanChile. "It is very probable that it disappears in August."

The yield on 10-year benchmark bonds in pesos fell four basis points to 4.42 percent amid a broad decline in yields and swap rates. The two-year swap rate fell five basis points to 3.51 percent as traders eliminated the probability of a rate hike in the next 24 months. The five-year swap fell seven basis points.

Disappointing Numbers

The bank raised rates twice at the end of last year as inflation remained above the target range and the government, analysts and policy makers forecast a gradual acceleration in economic growth. That pick-up is being pushed further and further back.

"The numbers are disappointing across the board, from the side of offer and of demand," Pincheira said. "I don’t know if we can say that the economy is worsening, but it is not showing signs of recovery"

Manufacturing production fell 2.4 percent in June from the year earlier, compared with the 0.5 percent drop forecast by analysts. Retail sales rose 1.1 percent over the same period.

One central banker said that “the evidence meant the option of reducing rates has more weight relative to the option of increasing them” as long as current economic tendencies led to inflation slowing more than forecast. He added that may be a premature conclusion for now.

The decline in industrial production is likely to continue as falling commodity prices stall growth in the mining industry, Pincheira said. Copper production was 473,608 tonnes in June, compared with 513,791 tonnes in the year-earlier period.

"Mining will continue affecting industrial production," Pincheira said. "Energy is the only sector that might show moderate growth, mainly driven by electricity generation."

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