MercoPress. South Atlantic News Agency

Chile’s Central bank slashes growth estimate

Chile's economy could shrink by as much as 0.75 percent this year, its first annual contraction in a decade, as the global crisis hits consumer spending and investment, the Central Bank announced on Wednesday. The bank slashed its 2009 GDP forecast to a range between a 0.75% contraction and a 0.25% expansion.

In its previous forecast in January, the bank estimated the economy would expand between 2.0 and 3.0% this year, and the government had hoped it would be able to maintain that growth through a 4 billion USD fiscal stimulus package.

While Chile's economic outlook has worsened, activity will begin to pick up in the second half of the year, the bank said in its Monetary Policy Report, which comes out every four months.

”In the course of the second half of 2009 and during all of 2010, the economy's annual (growth) rates will become positive again,” Central Bank President Jose De Gregorio told a Senate committee in televised remarks.

De Gregorio mentioned heavy monetary and fiscal stimulus as well as Chile's strong economic fundamentals as driving the projected recovery.

In the report, the bank slashed its 2009 inflation forecast to 0.6% from 3.1% and said further cuts to its benchmark interest rate may be necessary. This rate is already at a historic low of 1.25%.

Domestic demand will contract by 4.7% this year, the central bank said, due to lower investment. Previously the bank had forecast 0.7% growth.

The bank overhauled its 2009 trade balance outlook, forecasting a surplus of 2.6 billion versus its prior estimate for a 2.4 billion deficit, as imports fall hand-in-hand with declining domestic demand and copper prices recover somewhat.

The bank raised its forecast for 2009 average copper prices to $1.80 per pound from $1.50. Copper, Chile's main export, had hit lifetime highs of over $4 per pound in July.