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Chile central bank seen cutting rates again to energize economy
March 13, 2014 / 4:20 PM / in 4 years

Chile central bank seen cutting rates again to energize economy

SANTIAGO, March 13 (Reuters) - Chile’s central bank is expected to again cut its key interest rate on Thursday to boost struggling economic growth, but a weaker peso and a surprise uptick in inflation could prompt a neutral bias going forward.

The bank has already reduced the rate by 75 basis points since October and after its last cut in February hinted it might be necessary to increase the monetary stimulus in coming months.

Weakness in the mining, manufacturing and the heretofore-robust retail sectors have weighed on growth. Monthly consumer prices meanwhile posted a larger-than-expected 0.5 percent rise in February due in large part to the effects of a depreciating currency.

With the economy showing its weakest growth in January since an earthquake devastated Chile in early 2010, market participants are betting the bank will now cut the rate by another quarter of a percentage point to 4.0 percent.

“(A) commitment to validate previous communications, combined with continued disappointments on the real activity data, should prompt directors to validate the February easing bias and to cut the policy rate again by 25 basis points today despite the recent surprise on the inflation front,” said Tiago Severo, economist at Goldman Sachs.

Close to 70 percent of the traders and analysts surveyed in the bank’s two most recent polls, published earlier this week, echoed that sentiment.

The expected rate cut would follow similar moves in Mexico and Peru late last year to spur economic growth. Both regional peers have since kept rates on hold. Brazil, by contrast, has hiked rates to head off inflation in a tightening cycle that may be near its end.

Chile’s central bank is seen striking a neutral tone for rates in the near term in its monetary policy statement as the effects of a falling peso currency, which has depreciated to a near five-year low, feeds through to the real economy in the form of higher inflation.

“In order to help the exchange rate the bank is going to have a neutral bias on rates going forward,” said Matias Madrid, chief economist at Banco Penta in Santiago.

“But it’s going to look at data on a month to month basis and could evaluate another cut if growth data disappoints again,” he added.

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