Chile keeps key rate unchanged amid slowest growth in 6 years

By Staff Writer

Mar 18, 2016 09:29 AM EDT

Chile's central bank Banco Central de Chile has not changed its key interest rate for the third consecutive month. The country is suffering from low paced economic growth. Its Inflation rate is alarmingly above the target of Chile government.

Analysts surveyed by central bank have lowered their growth projections gross domestic product several times for 2016. Expansionary monetary policy and surging government spending couldn't revive the economy which is suffering from slump in commodities markets. Expansion has even further slowed down in January. 

Chile recorded the slowest economy growth in six years in January 2016 following two rises in late 2015. Chile's central bank Banco Central de Chile President Rodrigo Vergara has decided to keep interest rate at 3.5 percent in line of forecasts made by 19 of 20 economists in a survey by Bloomberg. One economist has predicted interest rate increase by 25 basis points.

Chile's central bank has highlighted weaker than expected growth rate in its latest statement. It also sees a gradual adjustment to rates. Chile's currency Peso on the other hand has turned weaker and this is pushing up import costs for the past two years.

Economists forecast 1.7 percent growth for 2016, lower from 3.5 percent gross domestic product growth rate in 2015.  The latest monthly survey from central bank is optimistic of the growth rate at 2.7 percent in 2017 and three percent in 2018. Inflation rose 4.7 percent in February and this is higher than the target of two percent set by Chile's central bank, as reported Yahoo Finance.  

Vergara said "Inflation will likely remain above four percent in the first half of the year and start to decline. Inflation will approach the three percent target in 2017. The fact that inflation expectations remain at three percent two years ahead shows the credibility of the central bank."

Antonio Moncado, an economist at Banco de Credito e Inversiones in Santiago, said "There should be just one more rate increase during the first half of the year. The slowdown in activity should ease pressure on inflation."

Some economists suspect that the interest rate would rise in the days to come. They cite the reasons of Central bank's remarks that it wouldn't be panic over tightening aggressive policy. Some measured adjustments in monetary policy could be possible in the wake of rising inflation, according to Reuters.

Imacec index, a proxy for gross domestic product (GDP), rose 0.3 percent in January, when compared with previous corresponding month. It was noted that Chile's economy suffered the most in 2010, when an earthquake devastated center-south part of the country. 

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