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By Robert Kozak in Lima, Peru
Economists and government officials in Chile and Peru are warning that a reversal of slow economic growth may be tougher than previously thought.
Big mining nations, Chile and Peru are suffering from weaker export prices for minerals such as copper, which has hurt investment as well as business and consumer confidence. Their central banks reduced interest rates Thursday to try to spur growth, and BBVA Research said another rate cut will likely take place in Chile this year while further monetary policy loosening in Peru can't be ruled out before the end of the year.
"With little chance of a significant rebound in growth over the coming years, we expect (policy) rates in both countries to remain low for a long time," Capital Economics said Friday.
Credit Suisse said this week that fixed investment in Chile will decline 4.7% this year, compared with a rise of 0.4% last year and by 12.2% in 2012. The bank said pace of investment growth in Peru will be lower this year than in the two previous years, but it won't be as dramatic as in Chile.
"There is a sense that both of the economies have been a free fall in the last few quarters," said UBS economist Rafael De La Fuente. "There has been a loss of confidence in both economies, especially in Chile in recent months."
Government officials in Peru who earlier forecast growth would pick up sharply in the second half of the year are now playing down those expectations. Finance Minister Luis Miguel Castilla told Congress this week that a vigorous recovery in gross domestic product "will still take a few months more."
Peru's finance ministry recently slashed its 2014 growth forecast to 4.2% from 5.7%, although some economists think that even that is too optimistic. BofA Merrill Lynch sees an expansion of 3.4% this year, down from the 5.8% growth posted last year.
In Chile, the central bank has whittled down its monetary policy rate by 175 basis points since last October, while at the same time steadily reducing growth forecasts.
The central bank now sees an economic expansion of from 1.75% to 2.25% this year, compared with growth of 4.1% last year and 5.4% in 2012. Credit Suisse this week lowered its 2014 GDP forecast to 1.9% from a previous forecast of 2.7% "to reflect disappointing results year to date."
"The slowdown has been deeper than what we expected," Chile's central bank director Joaquín Vial told company executives at a conference in Mexico this week.
President Michelle Bachelet has promised to spend an extra $500 million before the end of the year to help boost growth.
"It is difficult to see what will be the catalyst in Chile for a turnaround in sentiment and investments," Mr. De La Fuente, the UBS economist, said.
Late Thursday the central bank in Chile cut its monetary policy rate by 25 basis points to 3.25%, while the Central Reserve Bank of Peru chopped its key policy rate by 25 basis points to 3.50%.
Monetary easing in Chile and Peru is in contrast with that taking place in Brazil, Latin America's largest economy.
While Brazil's GDP growth is forecast to be as low as 0.5% this year by economists surveyed by the central bank, interest rates remain at 11%, up from 7.25% early last year. With inflation at the 6.5% ceiling of the banks' target range, all indications are that interest rates won't come down before 2015 at the soonest, analysts say.
Paulo Trevisani in Brasília contributed to this article.
Write to Robert Kozak at robert.kozak@wsj.com
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