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Chile to grow 2%-3% this year, says the central bank
Wednesday, April 3, 2024 - 08:32
Banco Central chileno foto de Reuters

“For both 2025 and 2026, a range between 1.5% and 2.5% is projected, with an economy that will converge to its potential growth rate,” the entity stated.

Chile's central bank first Monetary Policy Report (IPoM) for 2024 reveals the monetary authority's vision of the national economy, forecasts and how this influences interest rates policy.

GDP is forecast to grow between 2% and 3% this year, an improvement from the December forecasts (1.25% and 2.25%) largely explained by an accelerated activity in the first quarter.

“For both 2025 and 2026, a range of between 1.5% and 2.5% is projected, with an economy that will converge to its potential growth rate,” said the central bank.

First Report of the year: Inflation

Regarding inflation, the document highlights that it has been showing a rapid decline from the records in 2022, approaching close to the 3% annual goal.

However, the January and February data exceeded expectations. According to the report, this responded to the depreciation of the exchange rate, higher prices in foreign goods, and readjustments of some local prices, among others.

In this context, the inflation outlook for 2024 was revised upwards, from 2.9% and 3.2% previously, to 3.8%. The adjustment was “influenced by the depreciation of the exchange rate, the deterioration of global cost factors in recent months - including the price of oil - and the higher inflation at the beginning of the year”

Meanwhile, the convergence of inflation to the target range is seen within a two-year horizon, while the cuts in the Monetary Policy Rate (MPR) will continue, with a magnitude and timing that will depend on the evolution of the macroeconomic scenario.

External risks persist

As noted on previous occasions, the main risks for monetary policy come from the external sector, with the report highlighting the international geopolitical deterioration (conflicts in the Middle East and the war in Ukraine) and “concern about China's weakness.”

And although global inflation continues to decline, there are threats coming from the reversal of some costs and persistence of high records in service items.

“(There are) doubts about falling inflation, especially in the US, where the resilience of the economy stands out supported by the dynamism of the labor market and private consumption,” states the report.

This, added to the projected postponement of Federal Reserve (Fed) rate cuts for the second half of the year, has affected the performance of different financial variables, including a global appreciation of the dollar.

Economic activity shows mixed results

The IPoM highlighted that along the performance of inflation, mining and non-mining components of the Imacec showed somewhat better results than expected. This responds to a combination of higher external demand, supply factors and some elements associated with a larger domestic demand.

This helped to growth of overall GDP in the first quarter. However, the central bank report warned that "given the transitory nature of some of the aforementioned elements, the central scenario anticipates lower dynamics in the coming months, in line with those considered in the previous report."

In the second half of 2023, domestic was somewhat weaker than projected, particularly in its tradable components.

The seasonally adjusted series of household consumption fell until the third quarter, according to the 2023 National Accounts, with a slight recovery towards the end of the year, leaving an annual contraction of 5.2%, higher than expected in the December report (-4.6%).

“For its part, gross fixed capital formation (GFCF) began 2023 with more dynamism, although it registered a sharp decline in the last quarter of last year,” the report detailed.