Bloomberg News

Chile May Keep Rate Unchanged at 5.25% on Dim World Outlook

September 15, 2011

(Updates with swap rate in sixth paragraph and breakeven inflation in 11th.)

Sept. 15 (Bloomberg) -- Chile’s central bank probably will keep its benchmark interest rate unchanged for a third straight month today after policy makers narrowed growth forecasts and cut inflation estimates on the deteriorating global outlook.

The five-member board, led by bank President Jose De Gregorio, will keep the overnight rate at 5.25 percent, according to all 16 economists surveyed by Bloomberg. The decision will be announced after 5 p.m. New York time. The bank paused in July and August after raising rates in 2011 faster than any rate-setting country tracked by Bloomberg other than Belarus.

The highest interest rates in more than two years have helped rein in inflation estimates, giving policy makers the freedom to keep borrowing costs on hold as they assess global economic developments. Chile is unlikely to follow the lead of Brazil, which cut rates last month, until the global slowdown becomes more pronounced.

“Changing rates now would be rushed because there isn’t enough data to make an accurate decision on how the situation abroad will impact us,” said Cristobal Doberti, an economist at Bice Inversiones in Santiago. “The bank most likely will keep rates on hold for the rest of the year.”

Policy makers, who raised borrowing costs 13 times in 14 months before holding at their July 14 meeting, will keep rates unchanged this year before cutting to 5 percent by March and 4.75 percent by September, according to the median estimate of 49 traders and investors in a central bank survey released yesterday.

Swap Rates

Chile’s three-month interest rate swap, which reflects traders’ views of average borrowing costs, fell 2 basis points, or 0.02 percentage point, to 5.20 percent at 8:02 a.m. New York time from yesterday.

The inflation rate will decline to 3 percent next year from 3.3 percent this year, according to a separate poll of 65 economists conducted by the central bank this month. The economy will also decelerate in 2012, growing 4.7 percent after expanding 6.5 percent in 2011, the survey showed.

The survey is in line with central bank forecasts that inflation and GDP growth rates will fall next year as the global economy decelerates.

‘External Impulse’

“The external impulse that the Chilean economy will receive in coming quarters will be lower than previously estimated,” De Gregorio told Senators in Valparaiso on Sept. 7. “The external scenario also has brought about major modifications in the inflationary outlook, especially in the short term.”

The central bank estimated this month that inflation would slow to 2.9 percent next year from 3.3 percent this year. The bank, which targets 3 percent inflation, had expected consumer prices to grow 4 percent this year in its June report.

One-year breakeven inflation, which reflect views of average price increases and is derived from the gap between nominal and inflation-linked yields, declined 7 basis points to 2.52 percent as of 9:14 a.m. New York time.

Inflation accelerated to 3.2 percent in August from 2.9 percent in July. The economy expanded 4 percent last month from the same month in 2010, its slowest pace since the aftermath of the February 2010 earthquake that caused $30 billion of damage in the $200 billion economy.

As the global economy weakens, policy makers have changed their outlook from the first half of the year when they expected borrowing costs to reach as high as 6 percent in 2011, De Gregorio told Senators in Valparaiso.

On Hold

“The monetary policy rate has reached ranges considered to be normal,” De Gregorio said. “The base scenario supposes that in the short term the monetary policy rate will be similar to its current level.”

The central bank reduced the upper range of its 2011 GDP growth estimate to 6.75 percent in its Sept. 7 report from 7 percent. Policy makers forecast economic growth of 4.25 percent to 5.25 percent in 2012.

“The negative tail risk associated with the performance of the global economy has clearly increased, while the outlook for domestic inflation has improved significantly,” Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc., said in a Sept. 13 report. “We expect the central bank to take time to carefully assess global developments and not to rush into a rate cut.”

--Editors: Philip Sanders, James Attwood

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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