A longshoreman checks a shipment of copper ingots set for export in Valparaiso, Chile. Chile's central bank cut its growth and inflation forecasts for 2012, partly because of falling demand for copper.Eliseo Fernandez/Reuters
Chile's central bank on Tuesday cut its 2012 growth and inflation outlook as Europe's financial mess starts to hit the world's top copper producer, bolstering bets the central will cut interest rates early next year.
The bank now sees the economy expanding between 3.75 per cent and 4.75 per cent in 2012, compared with a previous outlook for growth of 4.25 per cent to 5.25 per cent, it said in its quarterly monetary policy report. The bank also trimmed its growth outlook for 2011 to 6.2 per cent, down from a previous estimate of between 6.25 per cent and 6.75 per cent.
"Our evaluation is that the more adverse external panorama will have consequences for Chilean growth and inflation, as well as for monetary policy," Rodrigo Vergara, the new central bank president, said in his first presentation to Congress.
"We have the firm determination to act to mitigate the impact of the external scenario on the Chilean economy."
The central bank said it sees 2012 inflation at 2.7 per cent and estimates this year's inflation at 3.9 per cent, up from a previous forecast of 3.3 per cent but within the bank's 2.0- to 4.0-per-cent annual target range.
Chile's central bank has held its base interest rate for six consecutive months at 5.25 per cent, but is expected by analysts to cut rates early next year as the global financial crisis hits the country's open and export-dependent economy.
The bank said rates in the short term will evolve in line with polls. Analysts in a central bank survey earlier this month forecast the bank would cut its key rate to 5.00 per cent by January and slash it by half-a-percentage point (50 basis points) by May.
"Next year we expect pre-emptive rate-easing will be the norm not just in Chile, but for Colombia, Peru and even Mexico," said Gary Kleiman, a partner at Kleiman International, a Washington-based emerging markets consultancy.
"Chile's central bank is one of the more cautious central banks in the region, but you can probably expect them to make an incremental 25-basis-point cut at the next meeting in January."
Finance Minister Felipe Larrain, in a newspaper interview on Sunday, said Chile will not be able to hit its 2011 economic growth target of 6.5 per cent as Europe's debt crisis is stinging the country's key industrial sector.
The fallout of Europe's sovereign debt crisis and a projection for lower copper demand from China, the world's top metals consumer, have started to be felt by Chile, which produces one-third of the world's red metal.
Chile's copper export revenue fell to $3.7-billion (U.S.) in November from $4.1-billion a year earlier.
Economic activity fell in October from September, according to central bank data released earlier this month. Consumer prices in the 12 months through November rose 3.9 per cent, inching toward the bank's 4.0-per-cent target ceiling.
"Inflation today is within the tolerance range. Medium-term expectations also remain in line with that range," said Mr. Vergara, a Harvard University-trained economist known as an inflation hawk, who was named central bank chief earlier this month.
The bank cut its outlook for an average copper price of $4.01 a pound in 2011 from a previous view of $4.15 a pound and lowered its outlook for 2012 to $3.50 a pound from a previous view of $3.70 a pound. In New York, the most-active U.S. copper futures contract, for March, settled down 0.7 per cent at $3.3085 a pound on Monday. Copper is down 25 per cent since the start of the year.
Chilean growth has been boosted by robust domestic demand, but the central bank projects it will slow to 3.7 per cent next year from an estimated 9.5 per cent in 2011.
The real exchange rate is seen remaining near current levels for the next two years, the bank said. The Chilean peso was trading 0.21-per-cent stronger at 519.40 per U.S. dollar on Tuesday, little changed from before the bank's report was issued. It has weakened sharply since reaching near three-year highs in August.
"The report's figures won't have any effect on the exchange rate, as they don't contain any major surprises," said Matias Madrid of Banco Penta in Santiago.
In a separate report, the bank said Chile's financial system is prepared to confront a more "restrictive" environment and stress tests show banks are well-positioned to face a scenario of slower economic growth.
The Financial Stability report also highlighted a decrease in gross capital inflows and foreign direct investment, part of a broader risk-aversion among investors.
Lower financing levels from Spanish and Italian banks have been offset by a more significant participation of U.S., Canadian and Asian entities, the bank said in its report.