Chile Holds Key Rate Near Zero to Stem Worst Slump Since 80s

(Bloomberg) -- Chile's central bank held its policy rate close to zero as the nation braces for its worst economic crisis in nearly four decades.

The bank's board left its key rate at 0.5% -- matching a record low -- at its meeting Wednesday, and signaled that monetary policy will remain expansive for a long time to support the economy during the coronavirus pandemic.

“The board's decision to maintain the rate at its technical minimum of 0.5% is consistent with the need for monetary policy to remain in this highly expansive mode for an extended period of time to ensure the convergence of inflation to the 3% target over a two-year horizon,” the central bank said in its statement.

Chile's businesses were already reeling from months of social unrest when the virus struck, causing a crash in consumer spending and hurting demand for the nation's copper exports. The central bank said last month it sees the economy shrinking as much as 2.5% this year, which would be its worst performance since 1983.

The International Monetary Fund's estimate is for an even deeper contraction, of 4.5%. Other major economies in the region such as Brazil and Mexico will fare even worse, according to the fund.

The Chilean peso has weakened 19% over the last year, while the benchmark stock index fell to levels last seen in 2009.

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Chile's policy makers have cut the benchmark interest rate by 1.25 percentage points over the last two months, are buying local bank bonds to boost liquidity and lower borrowing costs, while also intervening in the foreign exchange market. “The board will evaluate options to intensify the monetary impulse and support financial stability through unconventional instruments if required,” the central bank said in its statement.

“The central bank didn't specify which concrete actions it will take in the coming months as until now macroeconomic data in general has been what we have expected,” said Sebastian Diaz, an economist at Pacifico Research in Santiago. “But if that changes, we would need a clearer sign on future steps for stimulus measures.”

At the same time, the government has promised fiscal stimulus measures equivalent to about 7% of gross domestic product.

“Today the problem isn't the interest rate,” said former central bank chief Vittorio Corbo in a phone interview before Wednesday's decision. “The central bank has been very aggressive in Chile. A lot of the operations of the central bank have to do more with getting credit moving and getting liquidity in the system.”