Wednesday, October 23, 2019

Chile cuts rate 3rd time as protests affect economy

     Chile's central bank cut its monetary policy rate for the third time and said it assumes "a further monetary boost is needed" to ensure inflation converges towards its target as recent events, which include violent protests against price hikes and a state of emergency, will affect economic activity.
     The Central Bank of Chile's board unanimously cut its monetary policy rate by a further 25 basis points to 1.75 percent and has now lowered it by 125 points following cuts in June and September.
     The cut in June followed a 25-point rate hike in January so the net reduction in the policy rate this year is 100 points.
     "The complex developments that have occurred in the country in recent days will have an impact on the evolution of the economy," the central bank said, adding activity in the short run will be affected by the partial breakdown of the country and damaged infrastructure.
      The central bank said its December Report would include an analysis of the impact of the recent events, the outlook for inflation and the response of monetary policy.
      Today's rate cut follows the central bank's warning in September that further easing might be required to boost inflation amid disappointing economic activity and the escalating trade conflict between the U.S. and China.
      Chile, the world's largest copper producer, has been hit by falling demand and a slump in prices for copper since June last year.
     Several cities in Chile, including the capital of Santiago, have been hit by days of riots, which have led to thousands of arrests and 15 deaths in response to a hike in public transportation costs.
     The violence led President Sebastian Pinera to declare a state of emergency, placing the military in charge of security. But Pinera has also acknowledged government failures and announced economic reforms intended to restore calm.
      The protests have hit financial markets hard, with the peso falling 2.2 percent to 726.6 to the U.S. dollar in recent days to be down 4.5 percent this year, Chile's main stock index has fallen 3.6 percent since last Friday, and JP Morgan has lowered the country to underweight from neutral.
     Looking abroad, the central bank said the external scenario was largely in line with it had expected in September "and continues to be marked by major tension spots, a deterioration of manufacturing, investment and global trade."
     In June the central bank cut its forecast for 2019 growth to 2.75 - 3.5 percent from the March forecast of 3.0 - 4.0 percent, and 2018's growth of 4.0 percent.



     The Central Bank of Chile issued the following press release:

"In its monetary policy meeting, the Board of the Central Bank of Chile decided to lower the monetary policy interest rate by 25 basis points, to 1.75%. The decision was adopted unanimously by all five Board members.
The external scenario is in line with forecasts in the September Monetary Policy Report, and continues to be marked by major tension spots, a deterioration of manufacturing, investment, and global trade. Accordingly, the growth outlook has been adjusted downward in several economies. The monetary authorities have further increased the stimuli while the markets, with ups and downs, show bounded increases in long-term interest rates and stock indexes. The copper price posted virtually no change since the last monetary policy meeting, and the oil price, despite transient supply disruptions, tended to decline.
Third-quarter data at hand are in line with the last Report’s baseline scenario. The expansion of activity outperformed that of the first half, while investment remained dynamic. On the consumption side, growth in the wage mass has been flat, consumer confidence has deteriorated and consumer goods imports have declined. Financial conditions are still favorable. CPI inflation is still near 2% annually, with persistently weak services in the CPIEFE. The various inflation expectations indicators show no significant variation.
The complex developments that have occurred in the country in recent days will have an impact on the evolution of the economy. Short-run activity will be affected by the partial breakdown of the country and damaged infrastructure. Towards the medium term, most important will be the magnitude and timeline of reconstruction works, the impact on confidence and the effects of the course of action announced by the Government. So far this scenario has had bounded effects on the local financial markets, including a depreciation of the peso and corrections in the fixed-income market. The stock exchange showed a somewhat sharper decline. The December Report will bring a thorough more informed analysis of the impact of the recent events on the economy, the inflation outlook and the response of monetary policy.
The Board’s decision assumes that for inflation to converge to the target a further monetary boost is needed, which will be assessed in the light of the macroeconomic scenario, especially after the events of recent days. With that, the Board reiterates its will to conduct monetary policy with flexibility, so that projected inflation stands at 3% over the two-year horizon.
The minutes from this monetary policy meeting will be published at 8:30 hours of Monday 11 November 2019. The next monetary policy meeting will be held on Friday 6 December, and the statement thereof will be published at 18:00 hours the same day."

    www.CentralBankNews.info


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