SANTIAGO, Dec 16 (Reuters) - Chile’s central bank is seen laying the ground work for future rate cuts and lowering its 2017 growth and inflation projections on Monday when the bank’s new president, Mario Marcel, presents the much-anticipated quarterly Monetary Policy Report (IPoM).
The bank is likely to take a more dovish tone as economic growth has remained stubbornly soft, the economy recently contracted for the first time in seven years in annual terms and inflationary pressures have retreated more quickly than anticipated.
“We believe inflation has ceased to be a risk for now,” said Felipe Guzman, senior economist with Credicorp Capital. “Considering that the economy will keep growing by around 2 percent, inflation will be about 3 percent in 2017 and fiscal spending will be lower in coming quarters, the central bank is justified in realizing two 25 basis points cuts during the first half of 2017,” Guzman added.
The bank already adjusted its previously neutral bias on rates to indicate that monetary stimulus may soon be in the cards when it held the benchmark interest rate at 3.5 percent on Tuesday.
Traders polled by the bank earlier this week saw the key interest rate at 3.0 percent in six months.
But Goldman Sachs warned that “the prospect of a tighter-than-expected monetary policy stance by the Fed should render the central bank relatively cautious, suggesting a somewhat limited room for rate cuts in the near term.”
Considering recent downside inflation surprises and weak economic activity, the bank is also expected to lower its current 1.75-2.75 percent economic growth projection and forecast of annual inflation of 3.1 percent in 2017.
“The bank will probably consider a more cautious outlook for growth next year ... it would be in the range of 1.5 percent to 2.5 percent,” said Sergio Lehmann, chief economist for BCI.
Analysts expect the bank to reduce the forecast for 2017 annual inflation to 2.8 or 2.9 percent. (Reporting by Anthony Esposito & Antonio de la Jara; Editing by Meredith Mazzilli)