By Sebastian Boyd
May 8 (Bloomberg) -- Chilean and Peruvian central bank policy makers cut lending rates and signaled they are prepared to carry out further reductions in a bid to spark consumer spending and fend off the effects of a global economic slump.
Peru’s bank cut its benchmark interest rate 1 percentage point to 4 percent late yesterday, the fourth consecutive monthly reduction. Chile trimmed borrowing costs by half a point to 1.25 percent, a record low.
Chile and Peru are acting to spur growth as the global financial crisis undercuts demand for their exports and curtails spending at home. Other regional central banks may follow suit with more aggressive rate cuts in a bid to fend off recession, said Alfredo Coutino, director of Latin America at Moody’s Economy.com Inc. in West Chester, Pennsylvania.
“All the countries in Latin America are being hit strongly by the international recession, and now they are trying to synchronize monetary policy with fiscal stimulus,” Coutino said. “The first two central banks doing this are Chile and Peru and the rest of the central banks in Latin America are going to have to be more aggressive in coming months.”
The International Monetary Fund predicts that Latin American and Caribbean economies may shrink a combined 1.5 percent this year. As gross domestic product falls, concerns that inflation may accelerate are abating, giving policy makers more room to cut rates.
Consumer prices in Chile have dropped for five of the previous six months, and Peru’s monthly inflation is near a two- year low. Meanwhile, Chile’s economy is shrinking at the fastest pace in more than a decade and Peru’s economic growth has fallen to the lowest in eight years.
Government Spending
Chile plans to spend at least $4 billion in government savings on tax breaks and subsidies to fuel growth. Peruvian Finance Minister Luis Carranza plans to spend $3 billion on a stimulus plan designed to spark domestic consumption.
Chile has trimmed borrowing costs by 7 percentage points this year, more than any other central bank rate tracked by Bloomberg, while Peru has trimmed 2.5 points from its key rate.
Elsewhere in the region, Brazil’s central bank lowered the so-called Selic target rate by 3.5 percentage points this year to 10.25 percent and the Colombian central bank lowered its overnight rate by 3.5 percentage points to 6 percent.
Mexico has cut borrowing costs by 2.25 percentage points to 6 percent. The central bank, led by Governor Guillermo Ortiz, will probably lower its benchmark rate by 0.75 percentage point to 5.25 percent on May 15, according to the median estimate of 12 economists surveyed by Bloomberg.
Rate Outlook
Peru’s central bank said yesterday that it will keep easing monetary policy as long as inflation and domestic demand keep slowing and the global economy gets worse. Chile’s rate-setting committee yesterday said it “doesn’t rule out that it may be necessary to reduce the monetary-policy rate again.”
After expanding 9.8 percent in 2008, Peru’s economy has stalled, growing just 0.2 percent in the year through February, the slowest pace in eight years.
Falling commodity prices may cut economic growth to 4 percent in 2009, according to Peru’s Finance Ministry.
Prices of copper, zinc, tin and silver, which account for 60 percent of Peru’s export revenue, have all dropped at least 22 percent since early July on declining demand. Exports fell for a sixth month in March, slumping 23 percent, according to state exporter association ComexPeru.
Chile’s decline in mining output and slowing consumer demand are shrinking the economy by the most in a decade. The economy contracted 0.7 percent in March from a year ago, a fifth straight monthly decline. It fell 3.9 percent in February, the deepest year-on-year contraction since 1999.
Commodity Exports
Copper, Chile’s biggest export, has fallen 47 percent since reaching a record $4.08 a pound in July. The value of exports from Chile slumped 40 percent in April from a year earlier.
Industrial production fell 7.1 percent in March from a year earlier, less than the 11.5 percent annual decline in February.
Retail sales fell 3.5 percent in March from a year earlier and purchases of durable goods such as washing machines and cars slumped 12.3 percent, the sixth month that durable goods sales have fallen, according to the statistics institute.
“In Chile you’ll have a recession; in Peru it’s a severe deceleration from a very high level,” said Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York.
Chile’s peso appreciated 0.4 percent against the U.S. dollar as of 10:37 a.m. in New York to 562.80 pesos. So far this year it is the best-performing of 26 emerging-market currencies tracked by Bloomberg.
The Peruvian new sol rose for the fifth straight day, appreciating 0.3 against the U.S dollar to 2.9555 per dollar.
To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net
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