Chile Central Bank Sees Slower Growth as Investment Falls

Chile’s central bank cut its economic growth forecast for this year for the third consecutive quarter, following a drop in investment that a cyclical decline in the mining industry didn’t fully explain, it said.

Gross domestic product will expand 2.5 percent to 3.5 percent compared with the previous estimate of 3 percent to 4 percent, the bank said in its quarterly monetary policy report released in Santiago today. Policy makers raised their inflation estimate for this year to 4 percent from 3 percent.

The central bank has cut the benchmark interest rate four times since October as a drop in copper prices and a jump in costs halted an investment boom in the mining industry. The economy grew at its slowest pace in four years in the first quarter, with demand dropping further in April and May and the opposition blaming government plans to raise taxes. Studies cited by the bank couldn’t fully explain the recent decline in investment, policy makers said.

“Investment has posted annual declines for three quarters, to which is added a faster-than-expected deceleration in private consumption, particularly in its durable component,” according to the report.

The government of former President Sebastian Pinera had forecast growth of 4.9 percent for this year. The new government that took office March 11 estimated growth of 3.4 percent on May 19.

Higher Inflation

“Tax reform could have an impact on savings and investment, but there is no evidence it has had an impact in the recent slowdown,” central bank President Rodrigo Vergara told lawmakers today. “We were in the high part of the cycle, now we are in the low part.”

As growth slows and the central bank cuts rates, a decline in the peso has pushed the inflation rate to 4.7 percent in May, above the bank’s 2 percent to 4 percent target range for the second straight month. The peso has weakened 10.8 percent against the dollar in the past 10 months.

Policy makers said they had been surprised by the extent of the pick-up in inflation.

“Inflation will remain above 4 percent for some more months, ending 2014 around that number,” the bank said. “During 2015 it will ease, reaching about 3 percent in the first half of the year, where it will remain” until the second quarter of 2016.

Inflation Pressures

Inflation expectations for the year ahead remain anchored at 3 percent, according to the central bank’s monthly poll of analysts.

In its base scenario, the central bank forecasts that the recent deceleration in the Chilean economy will reduce internal inflationary pressures and help consumer prices converge toward the mid-point of the target range.

Policy makers forecast investment would decline 0.7 percent this year, compared with their previous estimate for a 0.8 percent increase. Their forecast for total domestic demand growth was reduced to 1.7 percent from 3.3 percent.

“In the last few months, activity and demand have continued slowing down and to the drop in investment in the last three quarters, a faster than expected deceleration in consumer spending has been added,” the bank said.

Investment fell 5 percent in the first quarter from the year earlier, compared with a drop of 12.3 percent in the previous three months.

Slowing Down

The drop in investment is spilling over into consumer demand. Retail sales rose 1.6 percent in April from the year earlier, the least since the 2009 recession, according to figures released by the National Statistics Institute on May 30.

Manufacturing output fell 4.2 percent in the month, the second-fastest pace in four years and completed the ninth contraction in the past year.

“The economy will recover slowly toward the second half of 2014, with higher expansion rates in the last months of the year,” the bank said. “This projection includes some degree of recovery in investment, given the internal and external financing cost conditions.”

Policy makers said that though they see a recovery in investment in their base scenario, a weak performance could last longer than expected. Since September, the investment growth forecast for the year has been cut by more than five percentage points, the bank said.

The central bank raised its estimate for the average price of copper this year to $3.1 per pound from $3. Chile is the world´s largest copper producer and the metal represents more than half of the country´s exports, which mainly go to China.

Gross domestic product expanded 2.3 percent in April, the second slowest pace since the aftermath of a devastating earthquake that hit Chile in February 2010.

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