Thursday, August 14, 2014

Chile cuts rate by 25 bps, will consider further cuts

    Chile's central bank cut its monetary policy rate by another 25 basis points to 3.50 percent, as expected, and repeated the guidance from July that it "will consider the possibility of making additional cuts to the monetary policy rate in line with the evolution of domestic and external macroeconomic conditions and its implications for the inflationary outlook."
    The Central Bank of Chile, which has now cut its rate by 150 basis points since October last year, said "local economic indicators show that the pace of expansion of output and demand has slowed more sharply than expected" and a drop in investment has been compounded by a more marked slowdown in private consumption.
    The rate cut was expected by economists despite an uptick in inflation, partly due to a depreciation of the Chilean peso currency. A recent poll of economists shows that they expect the central bank to cut rates further to 3.0 percent by end-2014.
    Chile's headline inflation in July rose to 4.5 percent from June's 4.3 percent, with core inflation rising to 4.0 percent from 3.8 percent. The central bank targets inflation at a midpoint of 3.0 percent within a one percentage point tolerance range plus or minus.

    In March the central bank forecast that inflation would end this year around 3.0 percent, with a temporary rise to between 3.5 and 4.0 percent, up from average 2013 inflation of 1.8 percent.
    The central bank said medium-term inflation expectations remain around 3 percent and the most likely scenario continues to assume that inflation will stay above the upper bound of the bank's tolerance range for some months before returning to the target.
   "This evolution will continue to be monitored with special attention," the bank said, adding that annual growth in nominal wages had accelerated and the unemployment rate remains low despite signs of less dynamism in the labor market.
    Chile's unemployment rate rose to 6.45 percent in June from 6.28 percent in May.
    Gross Domestic Product expanded by 0.7 percent in the first quarter from the previous quarter for annual growth of 2.6 percent, down from 2.7 percent in the fourth quarter and well below growth rates of above 5 percent in recent years.
    The peso was quoted at 577.7 to the U.S. dollar today, down 10 percent since the start of the year.



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