UPDATE 1-Chile central bank will likely downgrade growth forecast

Thu Mar 20, 2014 10:43am EDT

(Adds bank's comments, background details)

SANTIAGO, March 20 (Reuters) - Chile's central bank will likely downwardly revise its economic growth projections for 2014 as activity and domestic demand have slowed more than anticipated, bank president Rodrigo Vergara said in prepared remarks on Thursday.

The bank had forecast in December in its last quarterly Monetary Policy Report (IPoM) that Chile's economy would expand between 3.75 and 4.75 percent in 2014.

Since then data has shown the economy in the fourth quarter grew at its weakest pace since early 2010, when a massive earthquake devastated the world's top copper producer. Full-year 2013 growth was 4.1 percent, the lowest since Chile's economy fell into a recession in 2009.

The next IPoM will be published at the end of March.

However, during the year, growth should accelerate, Vergara said.

Faced with stalling growth and cooling domestic demand, especially in investment, the bank has cut the key interest rate by 100 basis points to 4.0 percent since October in an attempt to stimulate the economy.

Vergara reiterated that the bank's board "will consider the possibility of making additional cuts to the policy rate in line with the evolution of domestic and external macroeconomic conditions and its implications on the inflationary outlook."

The silver lining to reduced domestic activity has been a softer current account deficit, Vergara pointed out.

Chile's current account deficit reached $9.49 billion in 2013, equivalent to 3.4 percent of gross domestic product.

Some market participants were concerned about Chile's relatively large current account deficit, which makes it vulnerable to reduced bond buying by the U.S. Federal Reserve, declining commodities prices and slowing economic growth.

But Chile's sovereign wealth funds and the central bank's international foreign reserves give it an "important liquidity buffer", said Vergara.

The country's two rainy day piggy banks, the Reserve Pension Fund and Social and Economic Stabilization Fund, held nearly $23 billion at the end of January, while the central bank's foreign exchange reserves amounted to over $40 billion. (Reporting by Felipe Iturrieta; Writing by Anthony Esposito; Editing by Chizu Nomiyama and Meredith Mazzilli)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.