Chile’s Central Bank Could Cut Interest Rate Again, Marcel Says

  • Policy makers concerned about weakness in the labor market
  • Rate reduction earlier this month surprised economists

Further weakness in Chile’s labor market could give the central bank reason to cut its key interest rate again following a surprise reduction earlier this month, the board’s president said.

“With the decline in construction activity, salaried work has suffered more than it had previously,” Mario Marcel said in an interview Saturday in Washington, where he participated in spring meetings of the International Monetary Fund and World Bank. “That is why we left open the possibility” for additional reductions.

Mario Marcel

Source: Central Bank of Chile

The central bank’s five-member board cut its benchmark interest rate for the third time this year on April 13 as inflation remained below their target range for a sixth straight month and the economy threatened to slip into a recession. Policy makers also left the door open to more easing due to a sudden decline in the number of people with salaried jobs, which raises concerns about the strength of consumer spending, Marcel said.

"To ensure inflation converges on the target, policy makers will evaluate the need for an additional increase in monetary stimulus," the central bank said in a statement accompanying its decision earlier this month.

With the inflation rate hovering below the 3 percent target and the economy contracting in February at the fastest pace since the 2009 recession, economists are split over how low rates will go. Traders have estimated the key rate will drop a quarter point to 2.5 percent from the current 2.75 percent.

As ever, Marcel says, the policy decision will be “data dependent.”

Still, both Marcel and Finance Minister Rodrigo Valdes have highlighted the temporary nature of the decline in economic growth, and have reiterated the economy will start to recover later in the year.

"From the price of copper, the stock exchange and political debate, everything is pointing to better growth in the next few quarters," Valdes said in an interview on March 30. "We are already seeing a pick-up in a lot of leading indicators."

The Chilean economy has endured more than three years of sluggish growth, the longest such period since the early 1980s, following a slump in copper prices. Repeated forecasts that a faster expansion was around the corner have proven premature, with gross domestic product contracting in the fourth quarter and possibly again in the first three months of this year.

The Imacec index, a proxy for GDP, declined 1.3 percent in February from a year earlier as a strike at the world’s largest copper mine slashed output and wildfires damaged large swathes of forestry plantations.

Weaker growth has led to the biggest slack in the economy since 2011, easing pressure on consumer prices.

— With assistance by Sebastian Boyd

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