Wednesday, August 14, 2013

Chile holds but again warns it may cut in coming months

    Chile's central bank held its policy rate steady at 5.0 percent, as expected, but again warned that it may cut rates in coming months if the economy continues to slow down.
    The Central Bank of Chile, which last cut its rate in January 2012, said global economic activity in the second quarter was generally lower than expected and surveys show that domestic consumption, which remains dynamic, is expected to ease and investment to moderate.
    "The consolidation of the trends outlines in the last Monetary Policy Report could call for adjustments to the monetary policy interest rate in the coming months," the central bank said, repeating its statement from July.
    Chile's economy has been slowing in recent months as exports weaken while domestic demand remains resilient and in June the central bank cut its 2013 growth forecast to 4-5 percent and its inflation forecast to 2.6 percent.
    But the central bank is still taking its time to evaluate the depth of the current slowdown, noting that international financial conditions had improved during the last month and the prices of metals, including copper, had picked up in recent weeks while food prices have dropped and the U.S. dollar has depreciated.

   Chile, the world's largest copper exporter, has been hit by lower demand from China and the central bank said growth expectations for emerging economies had declined further though "some recent indictors for China point to a stabilization of its rate of expansion."
    In the first quarter, Chile's Gross Domestic Product expanded by 0.5 percent from the fourth quarter, the lowest quarterly rate in seven quarters, for annual growth of 4.1 percent, down from 5.7 percent in the previous quarter.
   "The board reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the policy horizon," the central bank said.
    Chile's inflation rate rose to 2.2 percent, the highest rate in nine months, but still within the central bank's tolerance range and the central bank said inflation expectations are near the target. The central bank has a one percentage point tolerance range around its 3 percent inflation target.
    The central bank's monthly poll of 65 analysts, released on Monday, showed that analysts expected the rate to remain steady this month but then decline to 4.75 percent in September and 4.5 percent by the end of the year. Inflation is forecast to end the year at 2.5 percent.


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