Chile’s economy shrinks for another month

(Bloomberg) — Chile’s economy shrank for a third straight month in May, faltering early in its recovery from stagnation last year, adding to pressure on policymakers to pursue interest rate cuts.

The Imacec index, a proxy for gross domestic product, fell 0.4% from April to May, the central bank said on Monday. Activity rose 1.1% from a year earlier, which was 2.5% below the average estimate of analysts in a Bloomberg survey.

Policymakers have cut their key rate by 550 basis points over the past year, prompting a steeper hike in the first few months of 2024. It is decreasing later. The bank is now signaling a less dovish approach amid rising electricity prices, adding to pressures on the economy.

On June 18, the bank’s board cut borrowing costs by a quarter-point to 5.75%, the lowest cut since the easing cycle began in July last year.

Earlier this month, central bank governor Rosanna Costa said inflation would not fall below the 3% target until the first half of 2026, no later than originally predicted.

In its quarterly monetary policy statement, the bank raised its 2024 inflation forecast to 4.2% from 3.8% and also raised its 2025 estimate after the government said it would raise frozen electricity prices from 2019.

In May, the central bank said today that iMaseq, excluding mining, fell 0.5% in the month and rose just 0.2% for the year. Manufacturing fell by 2.3% and trade by 0.4% for the monthly decline.

Data released on Friday showed that industrial production and retail sales grew less than forecast in May and that output contracted unexpectedly, while the unemployment rate surprisingly fell. Copper output was better than expected and the highest this year, rising 8% from both April and the previous year.

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