By James Attwood and Sebastian Boyd

March 13 (Bloomberg) — Chile’s government-owned Banco del Estado de Chile today said it will cut interest rates to consumers, adding pressure on the country’s private banks to follow suit.

    
Chile’s central bank last night slashed its benchmark interest rate by 2.5 percentage points, bringing cuts this year to 6 percentage points, the steepest reduction since the bank started using its interest-rate policy 15 years ago.

    
Government officials, including Finance Minister Andres Velasco, have urged banks to pass on rate cuts to customers.

    
“It is crucial that credit flows,” Velasco said today. The central bank’s surprise rate reduction last night, “creates even more space for banks to lessen credit restrictions.”

    
Banco del Estado will trim interest rates by at least 4 percentage points on the assumption that the central bank will lower its benchmark rate by a further 1.25 percentage points to 1 percent, Chairman Jose Luis Mardones said today.

    
“We will not wait any longer for the rates to keep falling — Banco del Estado is lowering them now,” Mardones said. “It is necessary to change people’s attitudes. If banks don’t begin lowering rates, the economy will be paralyzed.”

                        Consumer Lending

Consumer loans by Chilean banks fell 1.6 percent in January from a year earlier, according to research by Santiago-based IM Trust.

    
“In Chile, credit should attenuate external shocks, not magnify them,” Velasco said Feb. 2.

    
Chilean lenders had already cut the rates they charge clients by about 2 percentage points while slowing loan growth, central bank economists said in a report on March 11.

    
The central bank’s five-member policy committee, led by President Jose De Gregorio, is reducing borrowing costs to stimulate growth after the economy shrank in January and economists forecast a contraction for February.

    
The decision is based on expectations of a rapid slowdown in inflation and brings monetary policy into line with the macroeconomic environment, the committee said last night in a statement accompanying its decision.

                        Shrinking Economy

Chile’s economy shrank 1.4 percent in the 12 months through January and may have contracted 1.1 percent in the year through February, according to the median estimate of 20 economists in a central bank survey.

    
Banco del Estado’s move will push private banks to cut borrowing costs, Rafael Cumsille, head of Chile’s retailers’ federation Confedech, said today in an interview.

    
“Public opinion wouldn’t understand if that didn’t happen,” Cumsille said. “BancoEstado has done well to take the lead. Private banks will have to do it themselves as soon as possible because of competition.”

    
Joblessness rose to 8 percent in the three months ending in January from 7.2 percent in the same period a year earlier, according to the national statistics institute.

    
Bank lending growth in Chile probably will slow to 0.9 percent this year from 11 percent last year, said Rodrigo Martin, head of research at Banchile Inversiones in Santiago.

    
“The transfer is never immediate,” Martin said. “There are studies that show the total transfer can take more than six or eight months. BancoEstado having the possibility of reducing rates aggressively in some way obliges the rest of the private banks to have lower lending rates.”