Chilean policy makers signaled that yesterday’s benchmark interest rate cut may be the last in the current cycle following eight reductions in 13 months.
Policy makers, led by bank President Rodrigo Vergara, reduced the overnight rate a quarter point to 3 percent, as forecast by 19 of 22 economists surveyed by Bloomberg.
Three analysts expected no change in the rate. The central bank removed a reference to evaluating the convenience of further reductions in a statement accompanying yesterday’s decision, while reiterating its commitment to meeting the 3 percent inflation target.
They also said that previous rate cuts were having an impact on credit conditions, even as the economy grew at the slowest pace in more than four years. “The bias is now clearly neutral,” said Andres Osorio, an economist at Credicorp Capital in Santiago.
“More reductions in the short term are highly unlikely.”
The economic slowdown has proved longer and deeper than the government expected, Finance Minister Alberto Arenas said in an interview this week, with investment contracting for four straight quarters.
Rate cuts and government plans to raise spending 9.8 percent next year should boost growth to 3.6 percent in 2015 from about 2 percent this year, he said.
The economy grew 0.3 percent in August from the year earlier, the slowest pace since the aftermath of an earthquake that devastated the center-south of the country in February 2010.
Gross domestic product expanded 1.9 percent in the second quarter from the year before, down from 3.8 percent in the same quarter a year earlier.
All Over
“The statement matches our expectations of a rate at the minimum for this cycle,” Benjamin Sierra, a markets economist at Bank of Nova Scotia’s Santiago unit, wrote in a note to clients. “Monetary policy has done all it can do under current conditions, and it is time to await the results.”
Lower interest rates have led the peso to weaken 16.4 percent against the dollar over the past 12 months, pushing up import costs and inflation.
The annual inflation rate climbed to 4.9 percent in September, the highest in five years and above the central bank’s 2 percent to 4 percent target range for the sixth straight month.
The central bank has said it expects the pick-up in inflation to be temporary and for the annual pace of consumer prices to return toward the 3 percent target next year.
Maneuvering Room
The change in bias comes a week after central bank director Pablo Garcia said in an interview that policy makers had room to cut rates once or twice more.
“There is space for rates to fall further,” Garcia said on Oct. 6. “We knew the third quarter was going to be weaker in terms of growth and that was considered within our options.”
Analysts polled by the central bank expect the key rate to remain at 3 percent into next year, according to a survey released Oct. 10. Economists have cut their growth forecast for this year to 1.9 percent from 4 percent in January.
“We now think the cycle of cuts is over,” said Nathan Pincheira, an economist at Banchile Inversiones in Santiago, who forecast today’s reduction. “Going forward, we see a prolonged period on hold, with the rate staying at 3 percent possibly all through 2015.”
bloomberg.com
Policy makers, led by bank President Rodrigo Vergara, reduced the overnight rate a quarter point to 3 percent, as forecast by 19 of 22 economists surveyed by Bloomberg.
Three analysts expected no change in the rate. The central bank removed a reference to evaluating the convenience of further reductions in a statement accompanying yesterday’s decision, while reiterating its commitment to meeting the 3 percent inflation target.
They also said that previous rate cuts were having an impact on credit conditions, even as the economy grew at the slowest pace in more than four years. “The bias is now clearly neutral,” said Andres Osorio, an economist at Credicorp Capital in Santiago.
“More reductions in the short term are highly unlikely.”
The economic slowdown has proved longer and deeper than the government expected, Finance Minister Alberto Arenas said in an interview this week, with investment contracting for four straight quarters.
Rate cuts and government plans to raise spending 9.8 percent next year should boost growth to 3.6 percent in 2015 from about 2 percent this year, he said.
The economy grew 0.3 percent in August from the year earlier, the slowest pace since the aftermath of an earthquake that devastated the center-south of the country in February 2010.
Gross domestic product expanded 1.9 percent in the second quarter from the year before, down from 3.8 percent in the same quarter a year earlier.
All Over
“The statement matches our expectations of a rate at the minimum for this cycle,” Benjamin Sierra, a markets economist at Bank of Nova Scotia’s Santiago unit, wrote in a note to clients. “Monetary policy has done all it can do under current conditions, and it is time to await the results.”
Lower interest rates have led the peso to weaken 16.4 percent against the dollar over the past 12 months, pushing up import costs and inflation.
The annual inflation rate climbed to 4.9 percent in September, the highest in five years and above the central bank’s 2 percent to 4 percent target range for the sixth straight month.
The central bank has said it expects the pick-up in inflation to be temporary and for the annual pace of consumer prices to return toward the 3 percent target next year.
Maneuvering Room
The change in bias comes a week after central bank director Pablo Garcia said in an interview that policy makers had room to cut rates once or twice more.
“There is space for rates to fall further,” Garcia said on Oct. 6. “We knew the third quarter was going to be weaker in terms of growth and that was considered within our options.”
Analysts polled by the central bank expect the key rate to remain at 3 percent into next year, according to a survey released Oct. 10. Economists have cut their growth forecast for this year to 1.9 percent from 4 percent in January.
“We now think the cycle of cuts is over,” said Nathan Pincheira, an economist at Banchile Inversiones in Santiago, who forecast today’s reduction. “Going forward, we see a prolonged period on hold, with the rate staying at 3 percent possibly all through 2015.”
bloomberg.com
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