Chile Leaves Key Rate Unchanged at 3% as Green Shoots Wither

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Chile kept borrowing costs unchanged for an eighth month as a much-heralded economic recovery loses steam and inflation remains around the top end of the target range.

Policy makers, led by central bank President Rodrigo Vergara, left the benchmark interest rate at 3 percent Thursday, as forecast by all 27 economists surveyed by Bloomberg.

Nine months after the government started to talk of a turning point and four months after hailing the green shoots of recovery, growth remains sluggish. The economy expanded less than analysts forecast in April, while exports and imports slumped at the fastest pace in six years the month after. At the same time, inflation is high after a year in which the peso has weakened 12 percent against the dollar.

“Inflation remains at 4 percent and that can´t be forgotten,” said Nathan Pincheira, an economist at Banchile Inversiones in Santiago. “We don´t see changes in the outlook for monetary policy in the rest of the year, that is, a hold at 3 percent.”

The central bank cut its economic growth forecast for 2015 this month and warned fiscal and monetary policy had “done their job,” saying that business sentiment needed to improve to sustain the recovery. Monetary policy will remain significantly expansive, policy makers said, without giving a timeframe.

Gross domestic product will rise 2.25 percent to 3.25 percent this year, the bank forecast, down from an estimate of 2.5 percent to 3.5 percent in the previous quarter and from 4 to 5 percent in September 2013.

Turning Pessimistic

Economists are also turning more pessimistic. They expect GDP to rise 2.6 percent this year, according to a central bank survey released Wednesday, down from a forecast of 2.7 percent in May and 2.8 percent in April.

“The economy is still showing signs of weakness and the central bank thinks that will aid an additional reduction in inflation,” said Alfredo Coutino, director for Latin America at Moody´s Analytics Inc., a unit of Moody´s Corp.

The Imacec index, a proxy for GDP, rose 1.7 percent in April from the year earlier, compared with the 2.3 percent forecast by analysts. In May, exports tumbled 22 percent from the year earlier, while imports declined 19.3 percent.

While growth slows, inflation remains high. Prices climbed 4 percent in May from the year earlier, compared with the 2 percent to 4 percent target range.

On June 3, the central bank cut its inflation forecast for the year to 3.4 percent from 3.6 percent and said price-growth will vary around 4 percent for some more months before stabilizing at about 3 percent in 2016.

Inflation “is expected to post high annual rates for some months,” the central bank said in a statement accompanying today’s decision. “Its evolution will continue to be monitored with special attention.”

(Updates with analyst comment in fourth paragraph.)
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