Chile Central Bank Stuns Market With a Half-Point Rate Cut

(Bloomberg) -- Chile’s central bank stunned analysts by cutting its key interest rate by 50 basis points, the biggest reduction in a decade, saying the economy could grow faster without fueling inflation.

Policy makers reduced the benchmark rate to 2.5%, surprising all 18 economists surveyed by Bloomberg. The analysts had expected borrowing costs to be left unchanged. The bank is famed as one of the most predictable in Latin America.

Growth has remained weak in the first four months of the year, even as a flood of immigrants into the country from Venezuela has increased its potential growth rate -- the pace at which the economy can expand without fueling inflation, the bank said. At the same time, the U.S.-China trade conflict has undermined global growth, cutting the price of Chile’s copper exports, it said in a statement accompanying today’s decision.

“Wow! Almost no-one expected that,” said Rafael de la Fuente, chief Latin American economist at UBS AG in New York. “Growth is weaker and potential growth is higher so the output gap just got bigger. They’ve got more room.”

Policy makers cut their estimate for the neutral rate of borrowing costs by a quarter-point, indicating that previous monetary policy wasn’t stimulating the economy as much as predicted.

“They are taking preventive action,” said Miguel Ricaurte, an economist at Banco Itau in Santiago. “We are probably going to have a long pause now to see how the global economy develops.”

Gross domestic product rose 1.6% in the first quarter from the year earlier, after expanding 3.6 percent in the last three months of 2018. Growth remained subdued in April, with the economy expanding 2.1 percent.

“The recovery of the economy has not been enough to close the output gap and fuel inflation,” policy makers said. “Because of that, the board estimates it necessary to recalibrate monetary stimulus.”

--With assistance from Maria Jose Campano, Sebastian Boyd and Laura Millan Lombrana.

To contact the reporter on this story: Daniela Guzman in Santiago at dguzman26@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Philip Sanders, James Attwood

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