Chile’s Economy Struggles Amid High Inflation and Recession

Summary

  • The world’s biggest producer experienced an economic slowdown, with a decrease of 1.1% from the last month.
  • Finance Minister Mario Marcel’s expectation of an end to the recession in the December IMACEC report was disproved, contradicting his anticipated economic growth of 2.5% for 2024.
  • After a quick post-pandemic recovery, Chile underwent a drastic economic decline in 2023. As inflation increased, the central bank raised the interest rates, which are now being lowered as inflation eases.
  • The latest reduction was a 100-basis point drop to 7.25% earlier this week, although there was a vote for a further 125-basis point decrease.
  • Despite the new IMACEC report indicating the economy is still struggling, there is a measurable increase in confidence due to the additional reductions in interest rates.
  • The drop in economic activity in December was due to decreased production and business activities but was slightly countered by improved services.
  • The decline in mining activity played a significant role in the overall economic deceleration.

Economic Downturn and Predictions

Global economic activity witnessed a 1.1% decrease from the previous month. This was contrary to Finance Minister Mario Marcel’s optimistic predictions last week of an anticipated 2.5% economic growth for 2024, based on the IMACEC report results.

Chile’s Economic Woes

Following a speedy post-pandemic recovery, Chile’s economy encountered a severe downturn in 2023. Inflation skyrocketed, forcing the central bank to increase the interest rates. Fortunately, as inflation rates began to drop, so did the rates.

Interest Rate Adjustments

An interest rate cut was executed on Wednesday, where the borrowing costs were lowered by 100 basis points to 7.25%. One board member even considered a more significant cut of 125 basis points. The latest IMACEC report emphasizes the need for further interest rate deductions, according to Andres Abadia, the chief Latin America economist at Pantheon Macroeconomics.

Media Reports and Economic Impact

Lastly, it’s important to note that lower goods production and business activity drove the year-on-year fall in economic activity for December. This was moderately balanced out by an uptick in service activity. As per the central bank, mining activity’s decline played a key role in deflating the broader economic perspective.

It’s imperative to note how such a fluctuation in the economy, persistently low-interest rates and variations in the goods and services sector can impact forex market trends and the valuation of associated assets.

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