(Bloomberg) — Chile’s economy contracted for a third straight month in May as the recovery from last year’s recession faltered once it began, increasing pressure on policymakers to continue cutting interest rates.
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The central bank reported on Monday that the Imask index, a gauge of gross domestic product, fell 0.4% in May from April. Activity rose 1.1% from a year earlier, below the median estimate of 2.5% among analysts surveyed by Bloomberg.
Policymakers cut the key interest rate by 550 basis points last year, triggering a sharp rebound in growth in the first few months of 2024. This has tapered off since then. Adding to the pressure on the economy, the bank is now indicating a less pessimistic approach amid a jump in electricity prices and growth expectations of up to 3% this year.
“These are disappointing economic numbers,” Creditorp Capital analysts Samuel Carrasco and Daniel Velandia wrote in a report on Monday. “As for the central bank’s forecasts, the central scenario is under pressure as the GDP growth estimate for Q2 2024 looks difficult to achieve.”
On June 18, the bank’s board cut borrowing costs by a quarter of a percentage point to 5.75%, the smallest cut since it began its easing cycle in July last year.
These are “disappointing economic numbers,” Creditcorp Capital analysts Samuel Carrasco and Daniel Velandia wrote in a report. “With regard to the central bank’s forecasts, the central scenario is under pressure as the GDP growth estimate for the second quarter of 2024 looks difficult to achieve.”
Earlier this month, central bank governor Rosana Costa said inflation would not slow to the 3% target until the first half of 2026, later than originally expected.
In its quarterly monetary policy report, the bank raised its 2024 inflation forecast to 4.2% from 3.8%, and boosted its 2025 estimate after the government said it would raise electricity prices that have been frozen since 2019.
The central bank reported today that the Imacec index excluding mining fell in May by 0.5% on the month and rose by just 0.2% on the year. The monthly decline was led by the manufacturing sector, which fell by 2.3%, and trade, which fell by 0.4%.
Data released Friday showed that industrial production and retail sales grew less than expected in May and manufacturing unexpectedly contracted, even as the unemployment rate suddenly fell. Copper production was above expectations and the highest this year, rising more than 8% compared to both April and the previous year.
(Updates with analyst comment in fourth paragraph)
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