Weekly Report - 11 September 2014 (WR-14-36)

CHILE | Economic growth forecast cut. On 3 September Chile’s central bank (BCCH) cut its economic growth forecast for 2014 to 1.75%-2.25%, down from its previous June forecast of 2.5%-3.5%. The latest projection suggests that the Chilean economy is set to post significantly lower growth this year than the 4.1% registered in 2013, providing further evidence of the economy’s marked slowdown. The BCCH attributed the fall in economic activity this year to the end of the international cycle of high prices for raw materials and mineral commodities - Chile’s main source of revenue. The price of copper, Chile’s largest export, has fallen to US$3.15 per pound (/lb) and is predicted to continue falling to US$3.05/lb by 2015. The cooling in domestic consumption (projected to increase by just 2.5% this year) has been compounded by a 4.2% fall in domestic investment levels following a jump in production costs which has halted the investment boom in the mining sector of recent years. Annual inflation is now forecast to come in at 4.1%, 0.1% higher than the previous estimate and still above the BCCH’s target rate of 3%. However, despite the mounting concerns that this could mark the start of a period of economic stagnation, BCCH president, Rodrigo Vergara, has told the senate that “the economic deceleration was an expected phenomenon” and pointed to predictions that economic growth will rise to 3%-4% in 2015. Economy Minister Luis Felipe Céspedes has said that “the country has all the tools to recover via an expansive monetary and fiscal policy, along with greater public investment”. In line with this, on 1 September President Michelle Bachelet unveiled a US$500m economic stimulus package. Furthermore, in anticipation of the slowdown, the BCCH began easing monetary policy in October 2013, cutting the benchmark interest rate six times since then to its current rate of 3.5% and announcing its intention to bring it to 3.0% by the end of the year.

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