MercoPress. South Atlantic News Agency

Chile cuts benchmark lending rate 2.5 percentage points

Chile's central bank cut its benchmark lending rate by a steep 2.5 points to 4.25%, citing declining inflation and slow economic growth. The rate cut is larger than the 1 to 1.5 points expected by the market.

Annual inflation has dropped to 6.2% for the 12 months ending in January. The central bank says it will maintain a monetary policy aimed at reaching its goal of 3% annual inflation. In a release Thursday the bank also said that the severe slowdown of the global economy has gone beyond what was expected and unemployment is increasing in Chile. The bank said it was the deepest cut since comparative records began in 1995 and that it would likely continue to relax monetary policy. "This decision is based within the framework of a significant fall in inflation, and heralds the monetary policy rate converging in line with the current macroeconomic environment and its risks" said the central bank statement. Many analysts expect Chilean economic growth to come in flat or even negative this year, after likely growth of 3.4% in 2008. The government is forecasting the economy will expand between 2 and 3% this year. Chile's consumer price index fell 0.8% in January, more than expected by analysts and the biggest drop for that month since 1943. That followed a deeper-than-expected 1.2% fall in December. The deep February rate cuts come after the government last month unveiled a 4 billion US dollars fiscal stimulus package aimed at boosting domestic demand, safeguarding and creating jobs and fending off the global crisis. Meantime the Chilean peso strengthened against the US dollar with money markets closing at an exchange rat of 592 pesos to the greenback. So far this year the Chilean peso has appreciated 8.22% against the US dollar after having lost 22.3% last year.