Chile Leaves Key Rate Unchanged as GDP Growth Remains Anemic

  • Key interest rate kept at 3.5% for second straight month
  • Analysts cut growth forecasts as price of copper declines

Chile’s central bank left the benchmark interest rate unchanged, pausing after two rate increases late last year, as the economy looks set for a third year of sluggish growth.

Policy makers, led by bank President Rodrigo Vergara, held the key rate at 3.5 percent Thursday, as forecast by all 24 economists surveyed by Bloomberg.

Finance Minister Rodrigo Valdes has said the government’s forecast of growth for this year of 2.75 percent is very high, indicating he will reduce it later in the year. He is behind the curve. Analysts cut their forecast this week to 1.9 percent from 3 percent in July as consumer and business confidence remain at the weakest levels since the 2009 recession and copper exports tumble. In a statement accompanying today’s decision, the bank highlighted the deterioration in the global economy.

“The central bank will start focusing more on activity and internal demand, especially with what is happening abroad,” said Felipe Alarcon, chief economist at EuroAmerica in Santiago. “There will be only one rate hike this year towards the end of the second quarter.”

Pressure remains on the central bank to raise interest rates after inflation accelerated to 4.8 percent in January from 4.4 percent the month before. Price-growth has exceeded the 2 percent to 4 percent target range in 19 of the past 22 months.

Rate Outlook

The central bank said in today’s statement that it would probably raise rates gradually to ensure inflation slowed toward the 3 percent target, the identical wording it used after the January meeting.

Weak growth has led economists to tone down their forecasts for rate increases. According to analysts surveyed by the central bank this week. the key rate will end the year at 3.75 percent, down from the 4 percent they forecast in December.

The central bank has cut its economic growth forecast seven times since March 2013 and now estimates an expansion of 2 percent to 3 percent this year, with risks on the downside.

“In our base scenario, we expect that the benchmark rate will end the year at 3.75 percent, with a new increase of 25 basis points in the second quarter,” BBVA economists said in a note to investors after today’s decision.

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