Chilean Central Bank Likely To Continue Monetary Easing: Capital Economics

(RTTNews) - The subdued outlook for the Chilean economy and weakening inflation pressures may prompt the central bank to lower the interest rate further in the coming months, Capital Economics Emerging Markets Economist Michael Henderson said.

The central bank, which cut the main interest rate by a quarter percent yesterday, will likely lower the rate further by 50 basis points to 4 percent by mid-2014, with growth and inflation set to remain weak for the foreseeable future. However, the pace of rate-cuts over the next 6-9 months will probably be fairly gradual, the economist said.

Capital Economics forecasts that Chile's economic growth will weaken to 4 percent in 2014 from around 4.3 percent this year, driven mainly by a further fall in domestic demand. However, if the current slowdown turns out to be more pronounced, there is scope for deeper rate cuts.

The case for additional easing is also supported by an extremely subdued inflation outlook. Although inflation is set to pick up in the coming months, it is expected to remain below 3 percent until late 2014, the economist noted.

The Banco Central de Chile on Wednesday lowered its policy rate further by 25 basis points to 4.5 percent, in response to fresh signs that domestic demand is cooling, following a similar reduction in October.

In the third quarter, the economy grew at a faster annual rate of 4.7 percent than the second quarter's 4 percent expansion. Growth was driven primarily by a rebound in mining exports which is unlikely to be sustained, the economist said.