Chilean central bank President Jose De Gregorio's decision to slash the country's lending rate by a steeper-than-expected 2.5 percentage points signals growing concern that economic growth has stalled, Bloomberg reported.
The bank's five-member policy committee yesterday voted to reduce the benchmark rate by the most in a decade to 4.75 percent. None of the 24 economists surveyed by Bloomberg expected such a large cut.
The bank said it reduced interest rates more than expected because of evidence that demand and output are weakening. The move, coupled with the government's $4 billion fiscal stimulus package, may help South America's fifth-largest economy rebound sooner and faster than anticipated, analysts said.
"There is bad news on activity ahead, this decision from the central bank confirms it," said Rodrigo Aravena, an economist at Banchile Inversiones in Santiago. "We have some pretty negative numbers still to come."
Aravena expects the economy to contract in the first quarter from the same quarter a year earlier. President Michelle Bachelet plans to run the biggest budget deficit since 1990 in a bid to create jobs and stimulate growth.
Economists in central bank polls have cut their forecasts for 2009 growth to 1.2 percent from 4.2 percent in September. In yesterday's statement, the bank said that "available information for output and demand for the fourth quarter of 2008 and the first of 2009 show a larger widening of the output gap than expected" when it published its growth forecasts on Jan. 14.