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In less than a year Central Bank of Chile Cuts Rates

In less than a year Central Bank of Chile Cuts Rates

Posted by José Peralta on August 18, 2014

The Chilean economy continues to slow with June’s GDP showing growth of just 0.8 percent from the year earlier period, and the slowest rate since the earthquake/tsunami of February 2010. GDP in 2012 was 5.6 percent and in 2013 4.1 percent.

The Bank’s most recent Financial Traders Survey shows a continued reduction in growth forecasts for 2014, now at 2.5 percent when in July they were looking for 2.9 percent, and in January 4.0 percent.

Expectations now are that rates will fall as low as 3.00 percent by year-end.

In their statement the Bank said, “the history of the local economy show that the growth rate of output and demand has declined more strongly than expected. A fall in investment has added a sharper slowdown in consumption private. ”

In respect to inflation which is a key component to rate reduction the Bank said, “the expectations of medium-term inflation to stay around 3%. The most likely scenario continues to believe that inflation will remain for some months above the upper limit of the tolerance range before returning to the goal, it will continue to watch developments with special attention. ”

As the US economy grows slowly, Europe has seen a possible recession with Germany’s latest GDP report as negative, the main driving economy in the European Union. “Recent information confirms the prospects of recovery in the United States, while Euro zone growth has slowed. Growth forecasts for emerging Asia remain stable while in Latin America have been revised down. External financial conditions remain favorable, but have shown some deterioration in recent weeks. Prices of raw materials have declined, including copper and fuels.”

As Friday was a stock market holiday for Chile there was no reaction in the peso, which registered a new 52-week low during the week. The “dovish” stance from the Bank in respect to further cuts could drive the currency lower when the markets open again for trading on Monday. “The Council will assess the possibility of introducing additional cuts according to the changing domestic and external macroeconomic conditions, and its implications for the inflation outlook. At the same time, reaffirms its commitment to conduct monetary policy with flexibility so that projected inflation at 3% over the policy horizon. ”

A lower peso makes exports more competitive, helping to stimulate the economy but makes imports more expensive driving inflation higher. Also lower commodity prices work both ways for Chile bringing oil prices down, energy being a major cost component for the country, but lower copper prices hurt the country’s largest export.

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