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Chilean central bank cuts rate again, warns of 'severe' Q2 contraction

Chile's central bank cut its benchmark interest rate for the second time in roughly two weeks, warning that the domestic economy will likely see a "severe" contraction in March that will extend through the second quarter.

Policymakers at Banco Central de Chile unanimously voted on March 31 to lower borrowing costs by 50 basis points to 0.50%, its lowest level in more than a decade. The decision followed a 75 basis points emergency rate cut in mid-March that was accompanied by other measures aimed at mitigating the impact of the coronavirus pandemic.

The global spread of the coronavirus has caused a sharp increase in risk aversion among investors, widespread stock market declines and currency depreciation, capital outflows from emerging economies and a steep fall in the price of commodities including copper, the bank said.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

"The board estimates that for inflation to converge to the 3% target, monetary policy needs to remain highly expansionary for an extended period," the bank said, noting that annual inflation rose to almost 4% in February.

The monetary authority also expanded a program for the purchase of banking bonds by $4 billion and eliminated maturity constraints that were previously imposed. As a result, the outstanding purchase balance for the program is now up to $5.5 billion.

In addition to the coronavirus outbreak, Chile's economy is also struggling with the fallout of widespread and prolonged social unrest that erupted in 2019 and caused GDP to contract 2.1% year over year in the final quarter of last year.