Chile central bank seen opting for new deep rate cut

Chiles market watchers are betting on a new aggressive central bank interest rate cut this month to combat a sharp economic slowdown caused by the global financial crisis, according to a Reuters poll on Tuesday. With forecasts ranging from a reduction of 100 basis points to 250 basis points, 15 out of 26 analysts and traders surveyed by Reuters expect to see a cut of between 175 and 200 basis points at Thursdays meeting.
The central bank slashed its benchmark interest rate by a much bigger-than-expected 2.5 percentage points to 4.75 percent last month, and signalled further cuts as it fights the specter of recession. It was the deepest cut since records began in 1995, and followed a 100-basis-point cut in January.
"We think (the central bank) will aim for a soft landing for rates, that is that we wont have a 250-basis-point or 300-basis-point reduction, but a softer cut," said Pamela Auszenker, head of research at the BCI brokerage. Chiles economy shrank at its fastest rate in nearly a decade in January, according to data released last week, with the IMACEC economic activity index falling 1.4 percent in the month from a year earlier - its biggest drop since July 1999.
The data came amid a raft of indicators highlighting a sharp slowdown in Chiles economy. The consumer price index fell 0.4 percent in February, the steepest drop for that month in 17 years as consumer demand was choked. Analysts polled by the central bank this week cut their outlook for 2009 economic growth to just 0.2 percent from an outlook of 1.2 percent the previous month, and forecast a 1 percent contraction in the first half of the year. Analysts say Chiles economy likely grew 3.4 percent in 2008.
"There is a wide range of forecasts for the likely central bank rate cut this Thursday (of between 100 and 250 basis points," Cristian Gardeweg, an economist with the Celfin Capital brokerage, said in a research note. "We are expecting a cut of 175 basis points to 3.0 percent and expect the central bank will then pause for a few months to see how the international and domestic economies develop," he added.