Chile Leaves Key Rate Unchanged Amid Slowest Growth in Six Years

Chile’s central bank left the benchmark interest rate unchanged for the third consecutive month as the economy expanded at...

Chile’s central bank left the benchmark interest rate unchanged for the third consecutive month as the economy expanded at the slowest pace in six years in January following two increases in late 2015.

Policy makers, led by bank President Rodrigo Vergara, held the key rate at 3.5 percent Thursday, as forecast by 19 of 20 economists surveyed by Bloomberg. One economist expected the bank to increase borrowing costs by 25 basis points.

Analysts surveyed by the central bank have cut their growth forecast for this year 10 times as expansionary monetary policy and increased government spending fail to revive an economy reeling from a slump in commodity prices. Expansion slowed even further in January, while inflation remained above the target range. In response to persistent inflation, policy makers are removing “a little” of the monetary stimulus, Vergara said March 10.

“The economy has lost force, while business and consumer sentiment remain negative, but the economy continues to expand and unemployment remains low, in part due to monetary policy,” Vergara said.

The Imacec index, a proxy for gross domestic product, expanded 0.3 percent in January from the year earlier, the slowest pace since the aftermath of an earthquake that devastated the center-south of Chile in February 2010.

Economists now expect the economy to expand 1.7 percent in 2016, down from 3.5 percent a year ago, according to monthly surveys published by the central bank. Growth will accelerate to 2.5 percent in 2017 and 3 percent in 2018, they forecast.

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While growth remains weak, inflation has stayed high. Prices rose 4.7 percent in February from the year earlier, with inflation remaining above the central bank’s 2 percent to 4 percent target range for most of the past two years as a weaker peso pushes up import costs.

“Inflation will likely remain above 4 percent in the first half of the year and start to decline,” Vergara said March 10. “Inflation will approach the 3 percent target in 2017; the fact that inflation expectations remain at 3 percent two years ahead shows the credibility of the central bank.”

–With assistance from Rafael Gayol To contact the reporter on this story: Javiera Quiroga in Santiago at jquiroga5@bloomberg.net. To contact the editors responsible for this story: Robert Jameson at rjameson@bloomberg.net, Philip Sanders at psanders@bloomberg.net, Vivianne Rodrigues at vrodrigues3@bloomberg.net.

By: Javiera Quiroga

©2016 Bloomberg News

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