UPDATE 2-Chile economy slowing faster than expected -central bank

Wed May 8, 2013 12:09pm EDT

Related Topics

* March economic growth was the slowest since July 2011

* Investment outlook has moved lower, cenbank says

* Peso hasn't weakened despite lower copper prices-cenbank

By Felipe Iturrieta

SANTIAGO, May 8 (Reuters) - Chile's robust economic growth is slowing faster than expected, central bank president Rodrigo Vergara said in a speech on Wednesday, citing signs of less domestic demand, particularly the outlook for investment.

Recent economic data "showed a greater slowdown than what we (the central bank) expected in our base scenario in our last IPoM (monetary policy report)," he said.

In that report, issued on April 2, the bank forecast 4.5 percent to 5.5 percent economic growth for Chile in 2013, easing from the 5.6 percent growth rate last year.

Even so, Vegara gave no indication that the central bank board would modify its benchmark interest rate of 5 percent when it meets again on May 16. Chile's central bank has frozen the rate since January 2012.

Vergara said that while the rate was high by international standards, it was neutral for Chile. In monetary policy parlance, a neutral rate does not spur or slow growth, all other factors being equal.

Chile's monetary policy was contending with opposing foreign and domestic forces, he said.

"What are these forces?" he asked rhetorically. "On one side you have a weak international economy with risks, along with ultra expansive monetary policies. On the other, there is a pretty strong domestic growth and demand."

Still, despite the robustness of economic growth Vergara said, "In the domestic economy, there have been recent signs of a deceleration of activity and domestic demand."

"In Chile, activity has halted the continuous growth trend that was displayed in most of 2012," he added.

INVESTMENT SEEN MOVING LOWER

"The outlook for investment, the main driver of growth in domestic demand lately, has moved lower," Vergara said. But he added that there aren't any big changes in "private consumption's trend."

Chile's economic activity growth in March was the slowest since July 2011, as expansion in the mining and retail sectors was partly offset by declining industrial activity and two fewer working days, according to government data released on Monday.

During the first quarter, economic activity grew 4.4 percent compared with the same period a year ago.

Recent data in the real-estate sector also points to a moderation in activity, though there aren't any big changes in "private consumption's trend," he added.

Regarding inflation, Vergara said that it has moderated due to a series of "specific and transitory factors."

Chile's consumer price index posted a 0.5 percent tumble in April, falling more than expected, on drops in transport, housing, water, electricity and fuel costs, government data showed earlier on Wednesday.

On the peso currency, Vergara noted that it hasn't depreciated even though prices for top export copper have, a situation which could help widen the nation's current account deficit.

The peso typically moves in line with copper prices, as higher prices mean more dollars entering the local market due to sales of the metal. The inverse is true of lower prices.

An attractive interest rate differential and so-called quantitative easing measures adopted in major economies have also helped fuel the peso's strength.

A currency intervention program is one of the tools at the bank's disposal, though using it comes with associated costs, Vergara reiterated.

The central bank deployed a dollar-purchasing program in 2011 to curb peso strength after it appreciated to its highest level in more than 2-1/2 years at 465.50 per dollar.

In midday trade on Wednesday, the peso was trading 0.15 percent weaker on the day to bid 471.00 per dollar.

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