Chilean Monetary Policy Statement Stresses Uncertain Outlook

March 18, 2010

The massive earthquake and tsunami on February 27 was a game changer.  An increase of the 0.5% monetary policy rate this month had never seemed likely, but an increase during 2Q10 had looked probable since Chilean growth was developing more quickly than anticipated.  Real GDP in 4Q09 had been 2.1% greater than a year earlier after declining 1.6% in the year to 3Q09.  Chile had received a big monetary stimulus, with seven straight rate cuts in 2009 from January through July totaling 775 basis points.  Commodity prices for this exporter of copper and other raw materials had meanwhile risen briskly.  A press release from the central bank today indicates that economic activity fell sharply in the immediate aftermath of the disaster but is likely to be faster next year than thought previously due to reconstruction.  Inflation is expected to get a sharp jolt in the near term.  On-year CPI inflation only emerged into the black last month, albeit 0.3%, but could approach 4-5% before long, which is above the 3% target.  The statement stresses that considerable uncertainty surrounds these baseline expectations and that the wisest policy move now is to wait and see how reconstruction evolves and how the Chilean economy actually responds.  The statement allows for a possible rate increase in the second quarter, but that now appears too soon to assess this kind of shock.  Chile may need more tender care to ensure that economic recovery survives this catastrophe.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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