(Bloomberg) -- Chile’s economic activity remained flat in April, stoking bets that the central bank will start to lower the benchmark interest rate from an over two-decade high as early as July. Swap rates tumbled.

The Imacec index, a proxy for gross domestic product, was unchanged on the month, below the 0.1% median estimate of analysts in a Bloomberg survey. From a year prior, it decreased 1.1%, the central bank reported on Thursday.

Chile’s central bank has stuck to its hawkish stance, emphasizing that headline and core inflation remain well above its 3% target even as the economy stagnates. Policymakers have said they see no evidence that the slowdown in inflation has been consolidated. Still, traders surveyed by the monetary authority see an easing cycle starting in July.

What Bloomberg Economics Says

“April data show Chilean activity is reversing course after a brief rebound in the first quarter. The print signals GDP will fall in 2Q, resuming the downtrend from the last three quarters of 2022. We expect the central bank to start cutting interest rates in 3Q.”

— Felipe Hernandez, Latin America economist

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Read more: Chile’s Central Bank Says Local Inflation Woes Remain Unresolved

Swap rates declined after the report, with the one-year tenor tumbling as much as 18 basis points to the lowest level since January.

Commerce posted a monthly decline of 2.4% in April on a fall in automobile sales, while services slipped 0.4% on weakness from business, according to the central bank. On the other hand, mining jumped 3.9% and industry increased 0.9%.

“Commerce and services are likely reflecting the negative impact from the economic backdrop, with very high interest rates, weakened expectations and no new relevant stimulus,” analysts at Bice Inversiones wrote in a note. “We expect the central bank to hold rates until the third quarter, when it will start a gradual easing cycle.”

In May, Chile’s central bank unexpectedly raised capital requirements, tightening credit conditions. While policymakers said the move sought to better prepare financial institutions for the event of an external shock, some economists said the bank may need to bring forward rate cuts to compensate.

Gross domestic product grew 0.8% in the first quarter from the prior three-month period, below the 1% forecast by analysts in a Bloomberg survey.

Chile’s Finance Ministry sees gross domestic product expanding 0.3% this year, versus a previous estimate of a 0.7% decline, according to estimates published in early May. The central bank had boosted its own outlook the month prior.

--With assistance from Giovanna Serafim and Rafael Gayol.

(Updates with analyst comments in fourth paragraph)

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