Chile’s Economic Slowdown: A Closer Look at the Implications for Policymakers

In May, Chile’s economy contracted for the third consecutive month, indicating that the rebound seen earlier this year may be losing momentum. This added pressure on policymakers to continue cutting interest rates. The Imacec index, which serves as a proxy for gross domestic product, declined 0.4% in May compared to April and increased by only 1.1% from the previous year, falling short of analysts’ expectations.

Over the past year, policymakers have reduced the key interest rate by 550 basis points, leading to a significant improvement in economic growth in the first few months of 2024. However, recent data indicates a slowdown in this growth trend. Additionally, the central bank is now taking a less dovish stance in response to rising electricity prices, cutting borrowing costs by only a quarter-point on June 18 to 5.75%.

Central bank governor Rosanna Costa has stated that inflation is not expected to reach the 3% target until the first half of 2026, which is later than originally anticipated. The bank also revised its inflation forecasts for 2024 and 2025, citing government plans to increase power prices that have been frozen since 2019.

In May, copper output exceeded expectations and reached its highest level this year with an increase of over 8% compared to both April and the same period last year. However, industrial production and retail sales grew less than expected while manufacturing unexpectedly shrank despite declines in manufacturing by 2.3% and commerce by 0.4%. To make matters worse, unemployment saw an unexpected drop in May