(Updates with comments from central bank statement in fourth paragraph.)
Oct. 13 (Bloomberg) -- Chile’s central bank kept its benchmark interest rate unchanged today for the fourth straight month, with policy makers indicating they may reduce borrowing costs if the global economy deteriorates further.
The five-member board, led by bank President Jose De Gregorio, held the overnight rate at 5.25 percent, as forecast by all but three of 20 economists surveyed by Bloomberg. Two analysts estimated the bank would cut rates to 5 percent and one forecast a half-point reduction.
After raising its key rate faster than any major economy behind Belarus in the first half of 2011, Chile has the flexibility to stimulate growth if the European debt crisis worsens. Policy makers may change rates depending on macroeconomic conditions, they said in a statement accompanying today’s decision.
“The deepening of the tendencies observed in the international economy could create a more adverse external environment,” policy makers wrote. That deterioration could have “possible consequences for growth and inflation in Chile, as well as for the direction of monetary policy.”
Today’s decision keeps the bank’s options open while anchoring inflation to central bank targets, Banco Bilbao Vizcaya Argentaria SA economist Alejandro Puente said.
“Future rate changes are going to depend on the impact of the international scenario and Chile’s inflation expectations,” he said by phone from Santiago yesterday. “Analysts were expecting this decision, which as a result won’t change the peso’s value.”
The peso declined 11 percent against the U.S. dollar last month, the second worst performance among major Latin American economies behind the Brazilian real, as copper prices slumped 25 percent. Copper accounts for more than half of Chile’s exports and about one-third of fiscal revenue.
“This central bank has never reduced the monetary policy rate in the face of a depreciation of this type and this strength,” Jorge Selaive, chief economist at Banco de Credito e Inversiones, said by phone from Santiago last week. “Cutting rates would feed inflationary pressures created by this change in the exchange rate.”
Inflation accelerated to 3.3 percent last month from 3.2 percent in August and 2.9 percent in July. The central bank, which targets annual inflation of 3 percent, estimates consumer prices will rise 3.3 percent in December from last year.
The peso, which weakened 1.2 percent today to 505.08 per dollar, will trade at 500 in December, according to the median estimate of 58 economists in an Oct. 11 central bank survey.
The same survey showed economists expect policy makers to reduce borrowing costs to 5 percent in December and 4.75 percent by March after keeping them unchanged today.
The central bank is ready to change its current monetary policy if the global economy deteriorates further, policy maker Rodrigo Vergara said in a Sept. 28 interview. The bank last reduced the key rate in July 2009 as the country suffered its worst recession in more than a decade.
Chile has since recovered and may grow as much as 6.75 percent this year, which would be its fastest expansion since 1996, according to central bank forecasts. Growth will slow in 2012, expanding between 4.25 percent and 5.25 percent, according to policy makers.
The Andean nation’s economic gains are moderating faster than estimated as concerns mount about the European debt crisis, the central bank’s research department said in a report yesterday.
Economic growth, as measured by the central bank’s Imacec index that acts as a proxy for gross domestic product, increased 4.6 percent in August and 4 percent in July after GDP surged 8.4 percent in the first half of 2011.
The world’s top copper producer is able to keep interest rates on hold because it is less exposed to a slowdown in the U.S. and Europe than other emerging countries, Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut, said by telephone.
Chile, whose biggest export market is China, depends more on Asia and domestic consumption for economic growth than on commercial and financial ties to the U.S. and Europe, he said.
China’s GDP will expand more than five-times faster than the U.S. this year, according to analysts surveyed by Bloomberg. Chilean demand is showing signs of “major vigor” even as it moderates, the central bank said in yesterday’s report.
“At the moment, we’re very happy with monetary policy, but that’s something we will keep analyzing,” Vergara said from his offices in Santiago. “There’s a danger in reacting too fast, but there’s also a danger in reacting too slowly.”
--With assistance from Veronica Navarro Espinosa and Ben Bain in New York and Sebastian Boyd and Eduardo Thomson in Santiago. Editors: Philip Sanders, James Attwood
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