Bloomberg News

Chile Central Bank Cuts Inflation Forecast on World Slowdown

December 20, 2011

(Updates with central bank comments in fourth paragraph and bank president’s comments in sixth.)

Dec. 20 (Bloomberg) -- Chile’s central bank cut its inflation estimate for 2012 on forecasts that economic growth will slow and the price of copper, the country’s leading export, will decline as the European debt crisis intensifies.

Consumer prices will rise 2.7 percent next year, while gross domestic product expands between 3.75 percent and 4.75 percent, the central bank said today in its quarterly monetary policy report. Three months earlier, the bank forecast growth of 4.25 percent to 5.25 percent and inflation of 2.9 percent.

The world’s leading copper producer will grow 6.2 percent this year after climbing 5.2 percent in 2010, the bank said. Chile hasn’t felt the full impact of the global slowdown, even as the price of stocks and commodities fall, according to a statement accompanying the report. The bank has left interest rates unchanged since July.

“Activity has evolved somewhat below projections, internal demand still is dynamic -- driven by gains in labor earnings -- and inflation remains within the acceptable range,” according to the statement. “At the same time, the local financial market has observed increased friction of late because of the tightening of global financial conditions.”

The central bank will reduce borrowing costs by 1 percentage point to 4.25 percent next year as the economic slowdown intensifies, according to the median estimate of economists in a Dec. 9 central bank survey.

‘Determination to Act’

“We have the tools that we need to face adverse situations,” central bank President Rodrigo Vergara told the Senate today, according to prepared remarks. “Most importantly, we have the sound determination to act in order to mitigate the impact of the external scenario on the Chilean economy.”

Under the bank’s “base scenario” of a limited impact at home from the global turmoil, its key interest rate will move broadly in line with estimates in market surveys, he said.

“It´s better to act preventatively, trying to anticipate problems,” Vergara said.

Inflation will ease in the first half of 2012 to the central bank target of 3 percent after reaching 3.9 percent this month, according to the report. Consumer price accelerated to 3.9 percent in November, close to the upper limit of the bank’s target range of 2 percent to 4 percent.

The price of copper will average $4.01 per pound this year and $3.50 in 2012 as global demand declines, according to the bank’s forecasts.

“The deteriorated external panorama we face will have consequences for Chile’s growth and inflation, as well as the orientation of monetary policy,” Vergara said. “Our great challenge right now is to face as best we can the effects of the external crisis on our country. To do so, we will have to use our experience as well as the instruments available -- in the right dose and at the right time.”

--Editors: Philip Sanders

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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