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UPDATE 2-Chile's central bank flags easing, revises down growth, inflation
December 19, 2016 / 2:26 PM / in 10 months

UPDATE 2-Chile's central bank flags easing, revises down growth, inflation

(Adds central bank president’s comments, background, details)

By Anthony Esposito and Antonio De la Jara

SANTIAGO, Dec 19 (Reuters) - Chile’s central bank flagged the possibility of future interest rate cuts and revised downward its forecast for 2017 economic growth and inflation in its highly anticipated quarterly Monetary Policy Report released on Monday.

The bank took a more dovish tone as economic growth has remained stubbornly soft and inflationary pressures have retreated more quickly than anticipated in recent months.

The bank forecast 2017 gross domestic product growth of between 1.5 percent and 2.5 percent, versus its previous forecast of 1.75 percent to 2.75 percent. It said the economy of the world’s top copper producer would expand 1.5 percent in 2016 in what would be the slowest growth since a 2009 recession.

Newly appointed bank president Mario Marcel said growth was expected to pick up next year because “the economy does not have imbalances, the mining sector will not repeat the sharp drops (in activity) of recent years and investment will increase following three straight years of annual reductions.”

In any case, the economic pickup would become more apparent in the second half of 2017.

The bank also reduced its forecast for annual inflation, saying it expected it to end 2017 at 2.9 percent, from a previous view of 3.1 percent.

Inflation is seen remaining on the lower end of the central bank’s 2 percent to 4 percent tolerance range for most of 2017 before returning to the 3 percent target toward the end of the year, the bank said.

Regarding the benchmark interest rate, the bank said its base case is similar to that in various market forecasts, which point to expectations of two 25-basis-point rate cuts over the two-year policy horizon.

“With that, we assure that monetary policy will continue to be expansive throughout the policy horizon,” the bank said.

Traders polled by the bank last week saw the key interest rate being cut a quarter of a percentage point to 3.25 percent in three months and to 3.0 percent in six months.

Board members of the bank mulled cutting the benchmark rate at the most recent monetary policy meeting on Dec. 13, when the rate was held at its current 3.5 percent, said Marcel.

At that meeting, the bank adjusted its previously neutral bias on rates to indicate that monetary stimulus may soon be in the cards.

Marcel said the bank adopted the expansive bias on rates considering recent economic activity and because the drop in inflation could be more persistent than previously anticipated. (Editing by Jeffrey Benkoe and Meredith Mazzilli)

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