Central Bank of Chile Unexpectedly Cuts Interest Rate to 5% on Slowdown in Domestic, Global Growth
Published by Minyanville
Chile’s Central Bank has surprised analysts by cutting its interest rate 25 basis points to 5%, despite high inflation in December 2011. It is the first cut since July 2009 and begins an easing cycle spearheaded in the region by Brazil back in August 2011.
Inflation last year ended at 4.4%, much higher than the government’s target of around 3% plus or minus a percentage point. Despite this and December’s consumer price index rise to 0.6% from November, the Bank claims that private sector inflation predictions are on target.
“The detailed observation of prices in the consumer price index basket doesn’t produce fundamental changes in recent trends,” the Central Bank said in a report focusing on the inflation figures.
Most analysts surveyed by the major news agencies were expecting the rate to stick at 5.25%, a figure held for the past six months. Just five of those questioned in a Bloomberg survey of 20 economists predicted the cut while the Bank’s own poll of traders released mid-week revealed similar expectations.
“Total and underlying inflation in December was higher than expected because of the prices of perishable goods and other foodstuffs and the delayed impact of the depreciation of the peso in the last quarter of 2011,” read a statement from the Bank. “Inflation expectations remain around target… Future changes in the monetary policy rate will depend on the impact of domestic and external macroeconomic conditions on the inflationary outlook.”
Slowing domestic growth as well as fallout from the crisis in Europe offset inflationary pressures to maintain a higher interest rate, according to analysts. “The bank considered more arguments on the side of growth than on inflation,” Mario Arend, Chief Economist at Celfin Capital, a local investment bank, told the Wall Street Journal.
“We believe the deceleration in economic growth [4% year-on-year], as well as worries about the lagged impact of tighter financial conditions on the real economy, led the [Central Bank] to look beyond still high current inflation and start the easing cycle,” wrote Tony Volpon and George Lei of Nomura in New York in a note to investors. “The almost 4% year-to-date rally in the Chilean peso also provided some comfort and helped anchor inflation expectations, as the currency is now back to its mid-September levels.”
With the easing cycle begun, many are predicting more cuts this year. Arend predicts the rate to end 2012 at 4.25%. Volpon and Lei agree. “We maintain our view that the [Central Bank] will continue the current easing cycle until the [rate] falls to 4.25%, though there will likely be pauses between cuts, depending on external developments, domestic growth and inflation data.”
Analysts are expecting Chile’s economy to lose steam this year, as global demand decelerates principally in China, the US and of course Europe. Growth last year was around 6.2% and is expected to fall to 4% in 2012.
“It’s evident the Chilean economy is decelerating,” Finance Minister Felipe Larrain told Bloomberg last week. “We’re still growing but at a lower rate than the first half of last year. The effects of the external crisis have affected us somewhat.”
This was evidenced by the price of copper dropping 21% last year. Chile is the world’s largest producer of the metal, which accounts for more than half of the country’s exports.
Copper prices are beginning to recover, however, pushing up the value of the Chilean peso. This week saw the peso break the 500 per US dollar barrier for the first time since early November.
“Copper has recovered a lot,” Mauricio Olivares, a trader at the local unit of Bank of Nova Scotia, told Bloomberg. “That is having an effect on an intraday basis, and the debt auctions in Spain and Italy were much better than expected.”
China’s greater appetite for riskier assets has played a large role in fueling the rise. The two nations are building diplomatic ties, reports Chinese news agency Xinhua.