Chile’s Weak Growth Set to Continue Into 2017, Central Bank Says

  • Bank assumes key interest rate to remain unchanged at 3.5%
  • Bank reduces economic growth forecast for 2017 to 1.75%-2.75%

Chile’s recovery from three years of sluggish growth is likely to be weaker than originally forecast as investment in Latin America’s wealthiest economy remains subdued, the central bank said.

Policy makers reduced their estimate for 2017 growth to between 1.75 percent and 2.75 percent from 2 percent to 3 percent, according to the quarterly monetary policy report. The bank raised its forecast for this year to 1.5 percent to 2 percent from 1.25 percent to 2 percent.

A month after removing their tightening bias on monetary policy, central bankers said their forecasts assumed no change to the benchmark interest rate for the foreseeable future. While some analysts now expect a rate cut within the year as inflation slows, policy makers warned that weak investment meant the economy’s ability to grow without pushing up prices had been reduced.

"The main concern is the low growth that the Chilean economy keeps experiencing," central bank President Rodrigo Vergara said, according to a copy of his speech to the Senate Wednesday. "It is something that we not only need to worry about, but that we need to take as a priority."

For Vergara’s view on what the government needs to do, click here

The central bank has left its key rate at 3.5 percent all year after raising it a half-point at the end of 2015, even as inflation remained above the 2 percent to 4 percent target range for much of the past two years.

Real Rates

The inflation rate will fall to 3.4 percent in August from 4 percent the month before, according to the median estimate of 15 analysts polled by Bloomberg. That would end more than two years of real interest rates in negative territory, the longest stretch in at least 20 years, adding to the incipient pressure on the central bank to cut its key lending rate.

The bank reduced its estimate for potential, or non-inflationary growth, next year to 2.8 percent from the 3.4 percent estimated last September, according to the quarterly report. The estimate for this year was reduced to 2.5 percent from 3.1 percent.

Gross domestic product contracted 0.4 percent in the second quarter from the previous three months as increased fiscal spending failed to revive consumer demand, while the mining industry continued to contract.

The third quarter also had an inauspicious start, with the Imacec index, a proxy for GDP, rising 0.5 percent from the year earlier, the slowest pace in almost two years. The unemployment rate climbed to 7.1 percent in the three months through July from 6.6 percent the year earlier.

If growth comes in below 2 percent this year, Chile will have recorded its slowest expansion over a three-year period since the early 1980s.

July’s lower-than-expected growth figure pushed the two-year swap rate down six basis points in the following two days to 3.36 percent as the chances of a rate increase within the year mount.