Chile Central Bank Trims Growth, Maintains Inflation Outlook

  • Sees growth of 1.25%-2.0% this year, vs 1.25%-2.25% in March
  • Lack of investment in mining sector is a source of concern

Chile’s central bank trimmed the top end of its growth outlook for this year on Monday, citing concern over investment, on the same day that it reported weaker-than-expected expansion in April.

The bank now sees growth of between 1.25 percent and 2 percent, compared with its March forecast of between 1.25 percent and 2.25 percent. The tweak fulfilled economists’ expectations that the bank would tighten the range while leaving the forecast broadly unchanged.

“The growth outlook is little changed,” bank president Rodrigo Vergara told Senators in a speech distributed by the bank in Santiago. “We expect the economy to continue growing below potential for a few more quarters, especially affected by the weak performance of those sectors most linked to investment.”

The central bank said it expects interest rates to follow the path priced in by markets at the end of May, implying a single quarter-point rate increase in the first half of next year. Sluggish investment, particularly in the country’s mining sector, is “worrying,” the bank said. The Imacec index, a proxy for growth domestic product, grew 0.7 percent in April from the year earlier, almost a third of the pace forecast by analysts polled by Bloomberg.

“If we don’t achieve faster rates of growth in investment it will be very difficult to meet our forecasts for economic recovery and we will see a further deterioration in the labor market,” Vergara said.

The reduced levels of confidence in the country were acting as a brake on investment, he said. Non-mining investment will probably recover next year to a level more in line with the pace of economic growth, policy makers said.

The median forecast of 67 traders and investors surveyed by the central bank on May 24 was that the key rate would remain unchanged through the end of this year, rising to 3.75 percent in 12 months.

Household debt rose in the fourth quarter of last year, driven by mortgage lending before sales of new homes fell in the first quarter because of a tax increase, the bank said in a separate report on financial stability. 

While the rate of bad loans in banks’ consumer lending portfolios is stable, “this may possibly increase in the case of a greater deterioration in the labor market,” the bank said. “Although current levels of capital are enough to absorb a scenario of severe stress. The extra cushion has diminished in recent years.”

Borrowers front-running an increase in VAT on property drove a surge last year in sales of housing under construction. That may have led to more relaxed conditions from lenders approving commitments to buy homes, which may in turn mean that buyers default on their promises when they apply for mortgages, only to find that mortgage criteria have tightened.

“Purchasers may be unable to keep their promises,” the bank said.

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