Chile Second-Quarter Economic Growth Slows as Rate Cut Looms

Chile’s economic growth slowed in the second quarter as domestic demand weakened, fueling speculation that the central bank will cut interest rates as early as next month.

Gross domestic product rose 4.1 percent from last year, compared with revised expansion of 4.5 percent in the previous three months, the central bank said in a report posted on its website today. The median estimate of 17 analysts polled by Bloomberg was for growth of 4 percent. Quarter-on-quarter, the economy expanded 0.5 percent.

The central bank kept borrowing costs unchanged at 5 percent on Aug. 13 for a 19th consecutive month as policy makers sought to reconcile a consumer spending boom with stagnant manufacturing output. Slower growth in domestic demand and a narrower-than-expected current account deficit in the second quarter should swing the balance in favor of lower rates, said Felipe Alarcon, an economist at Banco de Credito & Inversiones in Santiago.

“There are only arguments for cutting,” Alarcon said. “There was speculation that the central bank would not cut rates this month because the current account deficit was going to be very high. In the end that wasn’t the case. We don’t understand why they didn’t cut last month.”

The yield on benchmark Chilean bonds due in 10 years fell three basis points, or 0.03 percentage point, to 5.25 percent as of 12:39 a.m. today. The peso weakened 1.2 percent to 519.01 to the dollar, the weakest level since December 2011 and the biggest decline among major Latin American currencies.

Domestic Demand

Chile’s current account balance, the broadest measure of trade in goods and services, posted a deficit of $1.63 billion in the second quarter, little changed from the year earlier and less than half the $3.9 billion median estimate of economists surveyed by Bloomberg.

Domestic demand grew 4.5 percent in the second quarter, down from 7.2 percent in the previous three months, because of a contraction in inventories, according to today’s report.

“What has to be kept in mind is that in seasonally adjusted terms, internal demand is slowing,” said Jorge Selaive, chief economist at Banco Bilbao Vizcaya Argentaria in Santiago. “The economy is slowing, but from higher levels.”

First-quarter growth was revised to 4.5 percent from 4.1 percent, with consumer spending rising 6.8 percent, compared with the 6.2 percent originally reported. In the second quarter, consumer spending climbed 7 percent.

‘Dynamic’ Demand

Retail sales growth in the world’s top copper producer averaged an annual 10.6 percent in the second quarter, while manufacturing contracted an average 1.2 percent, according to the National Statistics Institute.

Consumer demand remains “dynamic” and hasn’t slowed as much as economic activity, the bank said in a statement accompanying this month’s rate decision, while signaling it may cut rates later in the year as growth slows from 5.6 percent in 2012.

The current account deficit was 2.4 percent of GDP in the second quarter, little changed from 2.5 percent last year, the central bank also said today. Policy makers in July forecast the shortfall would reach $13.2 billion for the year, compared with $9.5 billion in 2012.

Chile had a trade surplus in goods and services of $299 million, the bank said. The price of copper, which accounts for more than half of Chile’s exports, has fallen 10 percent this year.

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