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Chile’s central bank cut its benchmark interest rate to a nine-year low, and hinted on more reductions, in a bid to stimulate an economy that has been caught between a global trade war and weakening domestic demand.
The bank’s board, led by President Mario Marcel, cut the key rate by 50 basis points to 2%, as expected by 14 of 20 economists surveyed by Bloomberg. The remaining economists expected a reduction of 25 basis points.
“The performance of the economy in the second quarter and its outlook point toward a longer-than-expected convergence of inflation to its target, which makes monetary stimulus more necessary,” the central bank said in a statement on its website. “An expansion of said stimulus may be required and will be evaluated in the next meetings.”
Chile’s economy has been slowing amid a drop in business and consumer confidence and a slump in the price of copper, the country’s main export product. Analysts now see it expanding 2.7% in 2019, less than the 3.4% forecast at the beginning of the year, according to data compiled by Bloomberg. The central bank will publish new estimates for growth and inflation on Wednesday.
After a surprise 50 basis point cut in June, policy makers left the key rate unchanged in July as they gathered more information about the global economy and waited to see how other central banks would react to a slowdown.
Bets on additional monetary easing are piling up, with traders forecasting Chile’s key rate to fall to 1.75% by March, according to the latest central bank survey.
What Our Economist Says
“The post-meeting statement has a clear dovish bias that points to additional interest-rate cuts if economic growth and domestic demand remain weak. Policy makers are poised to maintain interest rates in the near term and wait for more information before making any additional changes, but lingering external headwinds and eroding household demand are likely to increase expectations for more rate cuts.”
--Felipe Hernandez, Latin America economist
(Updates with quote from Bloomberg economist in seventh paragraph)
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