Chile Cuts Key Rate as Mass Unrest Clouds Growth Outlook

(Bloomberg) -- Chile’s central bank cut its benchmark interest rate for the third time in five months and said additional easing may be needed as the worst civil unrest in decades threatens to slow economic growth.

The bank’s board, led by President Mario Marcel, cut the key rate by 25 basis points to 1.75%, as expected by 19 of 21 economists surveyed by Bloomberg. Two economists forecast a reduction of 50 basis points, following similar cuts in June and September.

The board met after five days of clashes between protesters and security forces, which left at least 18 dead. The disorder led some analysts to forecast more aggressive monetary policy in the near term, as well as an easier fiscal stance as the government bows to pressure for more social spending.

“In the short term, activity will be affected by the partial paralyzation of the country and the damage to infrastructure,” the central bank said in a statement accompanying its decision.

Policy makers are expanding stimulus after they downgraded forecasts for economic growth and inflation last month and highlighted the risk of a slowdown in consumer spending. Weaker Chinese demand for the country’s top export, copper, has dimmed the outlook for investment, and protests in cities across Chile this week creates further uncertainty for business and consumers, clouding the near-term outlook for economic growth.

“Toward the medium term, the magnitude and speed of reconstruction, the impact on sentiment and the effects of the measures announced by the government will be important,” board members said in their statement.

The monetary authority lowered its rate by a half-point in June and again in September, joining the global wave of central banks seeking to cushion the effects of the U.S.-China trade war. Chile’s central bank considered cutting interest rates by 25-to-75 basis points last month, according to the minutes of that monetary policy meeting.

Annual inflation unexpectedly edged closer to the bottom of the central bank’s target band in September after prices for the month were unchanged, bolstering the case for more stimulus.

An unexpected spurt in economic growth in August on the back of stronger mining will likely prove short-lived given the weakness in consumer spending, said Quinn Markwith, an analyst at Capital Economics Ltd in London. “We’ve seen a couple of months of better activity, but policy makers are more concerned about fundamentals. They’re very comfortable with a loosening stance.”

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson

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