Chile's Economy Shrinks for a Third Month as Rebound Falters

Chile’s economy experienced a contraction for the third consecutive month in May, as the rebound from the previous year’s stagnation appears to be faltering. The Imacec index, a proxy for GDP, decreased by 0.4% in May compared to April, according to data reported by the central bank on Monday. Although activity showed a 1.1% increase from the year before, it fell short of the 2.5% median estimate of analysts.

The contraction in the economy comes after policymakers reduced the key interest rate by 550 basis points over the past year, which fueled a robust growth rebound in the initial months of 2024. However, the momentum has since slowed down. Adding to the economic pressures, the central bank is now adopting a less dovish approach due to a surge in electricity prices.

On June 18, the central bank’s board lowered borrowing costs by a quarter-point to 5.75%, marking the smallest cut since the easing cycle began in July last year. Earlier this month, central bank governor Rosanna Costa stated that inflation would not slow down to the 3% target until the first half of 2026, which is later than initially forecast.

In its quarterly monetary policy report, the bank revised its 2024 inflation forecast to 4.2% from 3.8% and boosted the 2025 estimate, following the government’s announcement of an increase in power prices that have been frozen since 2019.

In May, the Imacec index excluding mining decreased by 0.5% in the month and rose only 0.2% in the year. The monthly decline was led by manufacturing, which decreased by 2.3%, and commerce, which dropped by 0.4%. Data released on Friday showed that industrial production, retail sales, and manufacturing grew less than expected in May, with manufacturing unexpectedly shrinking. Despite this, copper output was above expectations and reached the highest level this year, increasing more than 8% compared to both April and the year before.

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