Wednesday, September 3, 2014

Chile: Numerous Factors Cause Central Bank to Project 2014 Growth to Modest 1.75-2.25% in Lieu of 2.5-3.5%

According to The Latin American Tribune, the Central Bank said the economy is decelerating faster than anticipated and has reduced the nation's 2014 growth forecast from a range of 2.5-3.5% to a more modest 1.75-2.25%. 

In its latest Monetary Policy Report, submitted to the Senate, bank chief Rodrigo Vergara also forecast an inflation rate of around 4% for this year and predicted that investment will fall 4.2% and that consumption will rise just 2.6%. 

Vergara also said the economic deceleration is “partly an expected phenomenon” attributable to tighter external financing conditions and the end of a global cycle of high prices for raw materials.

Chile has been hit by a drop in the international price of copper, its main export product, and a sharp decline in mining investment relative to the large reconstruction-related outlays in that sector following the massive 2010 earthquake.

A more recent factor, a slowdown in the growth in real wages, has adversely affected private consumption, Vergara said.

COMMENT: Growth in consumption has been tepid despite the Central Bank’s expansionary monetary policy, including a lowering of interest rates by 150 basis points since October 2013, the monetary authority said.

“That, along with other factors, has had a significant effect on the rates structure, particularly long-term rates, which are at historically low levels,” Vergara said.

The combination of these factors leads the Central Bank to conclude that the “national economy’s lower dynamism will be more persistent than initially forecasted.”

The Central Bank, however, expects Chile’s economy to bounce back in 2015 to grow between 3-4%.

That expansion will be fueled by “greater monetary stimulus and lower market rates, greater fiscal stimulus, higher growth by (Chile’s) trading partners, real depreciation of the peso, and an improvement in the private sector’s expectations,” Vergara said.