Chile Economic Rebound on Hold as Central Bank Cuts Forecast

  • Policy makers reduce 2016 GDP growth forecast to 1.25%-2.25%
  • Central bank cuts inflation estimate to 3.6% from 3.8%

Chile´s long-heralded economic recovery is on hold once again, at least for the rest of this year, the central bank said, cutting its growth and inflation forecasts for 2016.

The world’s largest copper producer will expand 1.25 percent to 2.25 percent this year, policy makers said in their quarterly monetary policy report Monday. The previous estimate was 2 percent to 3 percent. Consumer prices will rise 3.6 percent, compared with the prior estimate of 3.8 percent.

The report “was a tad more dovish than we anticipated,” Goldman Sachs Group Inc. said in a note to clients. “The revision to the growth outlook was a touch deeper than expected , and there was a fair amount of uncertainty whether the central bank would actually lower its inflation forecast.”

Increased government spending and loose monetary policy have failed to revive growth in an economy reeling from a slump in copper prices, prompting policy makers to reduce their growth estimates for eight consecutive quarters. Now the government is scaling back spending increases and the central bank has started to raise interest rates, adding to headwinds in an economy that expanded at the slowest pace in six years in January.

“The economy will grow beneath its potential for a good part of the forecast period,” policy makers said today. “Activity and demand have lost strength, the labor market has weakened and consumer and corporate sentiment remain pessimistic.”

Weaker growth convinced policy makers to leave the benchmark interest rate unchanged at 3.5 percent for the third consecutive month on March 17, following two increases toward the end of last year. The bank will continue to withdraw monetary stimulus, though at a slower pace than forecast in the last quarterly report, policy makers said today. Bank President Rodrigo Vergara told lawmakers later that rates will probably rise in line with analyst estimates, meaning two quarter-point increases.

Still, monetary policy will remain expansive, helping to lift economic growth to 2 percent to 3 percent in 2017, the bank said.

Weak growth and low interest rates have pushed the peso down 8.1 percent against the dollar in the past 12 months, pushing up the cost of imports and fueling inflation. The bank doesn’t expect the currency to continue weakening at the same pace, according to the report.

“Data confirms inflation will gradually converge to 3 percent, though it will remain above 4 percent in the first half of 2016,” policy makers said. “It will reach 3 percent during the first half of 2017.”

Consumer prices rose 4.7 percent from a year earlier in February, with the inflation rate remaining above the central bank’s 2 percent to 4 percent target range for much of the past two years.

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