MercoPress. South Atlantic News Agency

Chile not immune but has “the tools to mitigate possible impacts”

Central bank member Rodrigo Vergara

Chile’s central bank and government have monetary and fiscal instruments to respond if growth moderates faster than forecast amid concern over the European debt crisis, bank board member Rodrigo Vergara said.

“Chile isn’t immune to the external financial events, but it has the tools to mitigate possible impacts” Vergara said during a speech in Santiago Monday. “The possibility of extreme scenarios is not low, but today is outside our base scenario”.

The 200 billion dollars economy is starting to see growth slow to rates approaching its 5% long-term trend, Vergara said. GDP will expand as much as 6.75% in 2011 after recovering from last year’s 8.8-magnitude earthquake and the 2009 recession, moderating to a range of 4.25% to 5.25% in 2012, he said.

Chilean borrowing costs of 5.25% are consistent with keeping inflation around the central bank target of 3%, he said. The central bank in August changed from a “restrictive” to a “neutral” bias by omitting language on raising rates and is willing to take additional steps if the outlook deteriorates, he said.

Policy makers will reduce the benchmark rate to 5% in December after keeping it on hold for a fifth straight month in November, according to the median estimate of 60 economists in an Oct. 11 central bank survey.

The bank will cut borrowing costs to 4.75% by March and 4.5% by September, which would be its lowest level since April 2011, according to the poll.

The bank said in its October report last week that: “Domestically, output and demand show signs of moderation. In the case of output, the slowdown is more pronounced than was assumed in the Monetary Policy Report’s baseline scenario; the opposite occurs with demand. Labour market conditions remain tight. CPI inflation rates have hovered around 3% y-o-y, while core inflation measures remain contained. Inflation expectations are close to the target“.