UPDATE 1-Chile central bank cuts rate to 3.75 pct to boost growth

Tue Jul 15, 2014 6:43pm EDT

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(Adds detail from statement, background, economist comment)

SANTIAGO, July 15 (Reuters) - Chile's central bank cut its benchmark interest rate on Tuesday for the first time since March as worries about a slowing economy outweighed concerns over above-target inflation.

The bank lowered the rate 25 basis points to 3.75 percent, citing weakening output expansion and demand, with a slowdown in private consumption compounding a drop in investment.

It also continued its loosening bias.

"The board 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 on the inflationary outlook," it said.

The bank began its easing cycle in October, reducing rates from 5.0 percent to 4.0 percent by March. Fears of fanning inflation had since stayed its hand.

However, the board was unusually divided over its decision in June, minutes of that meeting showed. The market had been split as to whether Tuesday's meeting would see a hold or cut.

On the one hand, the economy of the top copper exporter has cooled quicker than predicted, as key mining investment has dried up and previously strong domestic demand has weakened. On Monday the government reduced its growth forecast for 2014 to 3.2 percent, down from 4.1 percent in 2013.

"We think the economy's recent evolution indicates the necessity of starting a bigger stimulus cycle, of between 75 and 100 additional basis points," said Ruben Catalan, senior economist with Bci Estudios.

On the other hand, a weakening of the peso has spurred inflation to an annual 4.3 percent, above the bank's 2 to 4 percent tolerance range, although the June reading was lower than forecast.

Worries over inflation would likely make the bank pause in the short term, said Catalan.

(Reporting by Santiago newsroom, Writing by Rosalba O'Brien; Editing by Diane Craft and Andrew Hay)

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