BackChile’s central bank cuts 2016 growth forecast to 1.25%-2.25%
Increased government spending and loose monetary policy have failed to revive growth in an economy reeling from a slump in copper prices
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Santiago, Chile: Chile´s long-heralded economic recovery is on hold once again, at least for the rest of this year, the central bank said, cutting its growth and inflation forecasts for 2016.
The world’s largest copper producer will expand 1.25% to 2.25% this year, policy makers said in their quarterly monetary policy report Monday. The previous estimate was 2% to 3%. Consumer prices will rise 3.6%, compared with the prior estimate of 3.8%.
“The economy will grow beneath its potential for a good part of the forecast period," policy makers said. “Activity and demand have lost strength, the labour market has weakened and consumer and corporate sentiment remain pessimistic."
Increased government spending and loose monetary policy have failed to revive growth in an economy reeling from a slump in copper prices, prompting policy makers to reduce their growth estimates for eight consecutive quarters. Now the government is scaling back spending increases and the central bank has started to raise interest rates, adding to headwinds in an economy that expanded at the slowest pace in six years in January.
In this context, slower than expected growth cannot be ruled out, the bank said in the report.
Weaker growth convinced policy makers to leave the benchmark interest rate unchanged at 3.5% for the third consecutive month on 17 March, following two increases toward the end of last year. The bank will continue to withdraw monetary stimulus, though at a slower pace than forecast in the last quarterly report, policy makers said today, forecasting that rates will have a similar trajectory to current market expectations.
Still, monetary policy will remain expansive, helping to lift economic growth to 2% to 3% in 2017, the bank said.
Weak growth and low interest rates have pushed the peso down 8.6% against the dollar in the past 12 months, pushing up the cost of imports and fueling inflation. The bank doesn’t expect the currency to continue weakening at the same pace, according to the report.
“Data confirms inflation will gradually converge to 3%, though it will remain above 4% in the first half of 2016," policy makers said. “It will reach 3% during the first half of 2017."
Consumer prices rose 4.7% from a year earlier in February, with the inflation rate remaining above the central bank’s 2% to 4% target range for much of the past two years. Bloomberg
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