August 8, 2014 / 7:25 PM / 6 years ago

WRAPUP 1-Chile central bank seen easing key rate further despite inflation

By Anthony Esposito and Rosalba O'Brien
    SANTIAGO, Aug 8 (Reuters) - Chile's central bank is expected
to cut the country's benchmark interest rate again next week,
extending its easing cycle despite stubbornly high inflation,
analysts said.
    Inflation in Chile touched 4.5 percent in July on an
annualized basis, government statistics showed on Friday, within
market expectations but above the central bank's target range of
2 percent to 4 percent for the fourth month in a row.
    Quickening inflation, spurred by a weaker peso that is
making imports more expensive, has created a quandary for the
bank, which has been loosening monetary policy but worries about
fanning consumer price increases further.
    Analysts said, however, that concerns about the economy
growing at its slowest pace in more than four years in June
would outweigh inflation fears and lead it to make additional
interest rate cuts. 
    According to a Reuters poll published on Friday, the central
bank is seen cutting its key rate by an additional
75 basis points to 3.0 percent by year-end, with the next
expected reduction coming next week. 
    "The activity and price data just published seem sufficient
to justify a rate cut of 25 basis points on August 14," said
Benjamin Sierra, financial markets economist at Scotiabank in
    "The current trend points to another cut of a similar
magnitude next month ... and with the information available now
it looks likely that there is space for an additional cut during
one of the three monetary policy meetings in the fourth quarter,
meaning the rate would end the year at 3 percent," Sierra added.
    Food and transport costs pushed Chile's consumer price index
 up a monthly 0.2 percent in July, the official INE
statistics office said. 
    Auto sales have been particularly hard hit by waning
consumer demand coupled with higher import prices, and the sale
of small- and medium-sized cars fell 13 percent in July compared
with a year earlier, the national automotive association said on
    Inflation is likely to remain above 4 percent through the
end of the year,  BCI economist Antonio Moncado said, adding
that the impact of the weaker peso has now been largely absorbed
and consumer prices are returning to normal.

 (Editing by G Crosse)
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