February 5, 2014, 2:38 PM ET
How Will Chile’s Central Bank Respond to Slower Growth?
By Robert Kozak
Chile’s economic growth is slipping. Its proxy gross domestic product expanded by only 2.6% in the last month of last year, likely bringing fourth quarter output to just 2.7%, which economists say would be the slowest rate in almost four years.
How the central bank responds is the question many are asking. The central bank last cut its policy rate to 4.5% in November.
Capital Economics says that recent currency weakness, against a backdrop of a widening current account deficit and rising inflation, means that there is little room for the central bank to ease.
“The more modest cuts in interest rates that we had penciled in for this year [0.5 percentage point to 4.00%] now seem unlikely,” it said.
BofA Merrill Lynch says that using local interest rate data for 13 economies, Chile is the only one where the market is pricing in interest rate cuts over the next 12 months.
Merrill says that turbulence in emerging markets isn’t expected to deter Chile’s central bank from cutting its policy rate by 25 basis points on February 18, pointing to below potential growth and weakening investments.
It says that its base case scenario sees a total of 75 basis points in cuts, although that could be revisited if central banks around the world increase rates, or if Chile’s peso weakens sharply.
Economists say Chile’s full year 2013 GDP likely expanded by 4.1%, which would be sharply down from the 5.6% rate posted last year.
“To be clear, we don’t expect economic growth to collapse. But we do think that Chile is entering a period where growth will be much weaker. We are nudging down our forecast for growth this year to 2.8% (from 4.0%; consensus 4.0%),” Capital Economics said.
How the central bank responds is the question many are asking. The central bank last cut its policy rate to 4.5% in November.
Capital Economics says that recent currency weakness, against a backdrop of a widening current account deficit and rising inflation, means that there is little room for the central bank to ease.
“The more modest cuts in interest rates that we had penciled in for this year [0.5 percentage point to 4.00%] now seem unlikely,” it said.
BofA Merrill Lynch says that using local interest rate data for 13 economies, Chile is the only one where the market is pricing in interest rate cuts over the next 12 months.
Merrill says that turbulence in emerging markets isn’t expected to deter Chile’s central bank from cutting its policy rate by 25 basis points on February 18, pointing to below potential growth and weakening investments.
It says that its base case scenario sees a total of 75 basis points in cuts, although that could be revisited if central banks around the world increase rates, or if Chile’s peso weakens sharply.
Economists say Chile’s full year 2013 GDP likely expanded by 4.1%, which would be sharply down from the 5.6% rate posted last year.
“To be clear, we don’t expect economic growth to collapse. But we do think that Chile is entering a period where growth will be much weaker. We are nudging down our forecast for growth this year to 2.8% (from 4.0%; consensus 4.0%),” Capital Economics said.
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