Chile Seen Cutting Key Rate Amid Mass Unrest: Decision Day Guide

(Bloomberg) --

Chile is expected to cut its key interest rate to a nine-year low amid slowing inflation, weak growth and the worst street violence in decades.

The central bank will lower its policy rate to 1.75% from 2% at Wednesday’s meeting, according to 19 of 20 economists surveyed by Bloomberg. One economist forecast a larger reduction, of half a percentage point, following similar cuts in June and September.

The board meets after five days of clashes between protesters and security forces, which left at least fifteen 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.

The central bank last month lowered its outlook for 2019 growth, warning of the risk of a further slowdown in consumer spending as well as weaker investment as Chinese demand cools for the nation’s copper.

Wednesday’s decision will published on the central bank’s website at 6:00 p.m. local time together with a statement from the bank’s board.

Here’s what to watch out for:

Inflation Outlook

Investors will pay close attention to the bank’s outlook for inflation, for signs that more rate cuts may be coming. The bank trimmed its 2019 inflation forecast to 2.7% last month, from 2.8%. Chile targets inflation of 3%.

The peso may weaken if policy makers surprise investors with a half-point reduction, BTG Pactual analysts Luis Oscar Herrera and Pablo Cruz said in a note Tuesday.

What Our Economist Says

We expect the central bank to cut interest rates by 25 basis points to 1.75%. The decision would be part of the adjustment that started after downward revisions to inflation and growth forecasts in September’s quarterly monetary policy report. Policy makers are likely to keep the door open for additional interest rate cuts depending on new information. The central bank would wait for more data before reacting to any potential impact from the protests.

--Felipe Hernandez, Latin America Economist for Bloomberg Economics

Economic Growth

Policy makers last month cut their 2019 forecast for economic growth to 2.25% to 2.75%, down from a range of 2.75% to 3.5%. The protests may dim the growth outlook still further by damping consumer and business sentiment. Prolonged mine strikes in solidarity with the protesters are the biggest risk, according to Quinn Markwith, an analyst at Capital Economics.

Global Environment

Analysts will also be paying close attention to the bank’s comments on global growth. Chile’s open economy and the sensitivity of copper demand to world growth, make the country particularly exposed to a slowdown in its trading partners. Weak external conditions limit Chile’s policy flexibility and increase the risk from domestic shocks, Bloomberg’s Hernandez said. The International Monetary Fund last week predicted the weakest global expansion in a decade, warning governments to be prepared for action in the case of a severe downturn.

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, Matthew Bristow

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