Chile Cuts Rates for First Time Since 2014 as Growth Falters

Updated on
  • Central bank reduced borrowing costs a quarter-point to 3.25%
  • Annual inflation has remained below target for three months

Chile’s central bank cut its key interest rate for the first time since 2014 after economic growth faltered and the inflation rate fell to the lowest in three years.

Policy makers, led by new bank President Mario Marcel, reduced the benchmark rate a quarter-point to 3.25 percent Thursday, as forecast by 20 of 22 economists surveyed by Bloomberg. Two analysts expected the bank to keep borrowing costs unchanged. The bank maintained its easing bias.

“The board forecasts that if recent economic trends persist, along with their implications for the medium-term inflation outlook, a further monetary impulse will be necessary,” policy makers said in a statement accompanying today’s decision.

Far from showing signs of a long-forecast recovery, Chile’s economy took a turn for the worse in the fourth quarter, with economic activity declining on an annual basis in October for the first time in seven years. The downturn has further eased pressure on consumer prices, which rose 2.7 percent in December from the year earlier, the smallest increase since November 2013 and below the 3 percent target for a third month.

"The surprising slowdown in economic activity and inflation is behind today’s decision," said Antonio Moncado, an economist Banco de Credito e Inversiones in Santiago. "We are forecasting a second rate cut during the first quarter, and another cut during the second quarter."

The bank had changed its monetary policy bias to expansionary from neutral in December, after discussing the possibility of a rate cut in the previous three meetings. Minutes of today’s meeting will be published Feb. 3.

Economists and policy makers have already reduced their growth forecast for 2017. The central bank cut its estimate in December to between 1.5 percent and 2.5 percent from 1.75 percent to 2.75 percent in September. The median forecast of economists surveyed by the bank is 2 percent.

The economy could grow as little as 1.7 percent in 2017, with inflation about 2 percent in the first half of the year, which will require further stimulus from the central bank, according former central bank chief Vittorio Corbo.

"If there isn’t an important recovery in investment, which depends mostly on business expectations and progress in reducing uncertainty, we will continue with this mediocre growth," Corbo told Pulso newspaper on Jan. 9.

— With assistance by Rafael Gayol

    Before it's here, it's on the Bloomberg Terminal.