Bloomberg News

Chile May Keep 5.25% Rate, Signal Possible Cut on Slowdown

October 13, 2011

(Updates interest rate swap in sixth paragraph and breakeven inflation in tenth paragraph.)

Oct. 13 (Bloomberg) -- Chile’s central bank will probably keep its benchmark interest rate unchanged for a fourth straight month today and may also signal its readiness to lower borrowing costs to safeguard domestic growth against a worsening global economy.

The five-member policy board, led by bank President Jose De Gregorio, will keep the overnight rate at 5.25 percent, according to 17 of 20 economists surveyed by Bloomberg. Two analysts expect a quarter-point cut and one sees a half-point reduction. The bank announces its decision after 6 p.m. Santiago time.

Five interest rate increases in the first half of 2011 give the central bank leeway to lower borrowing costs to stimulate South America’s fifth-biggest economy should a global slowdown batter financial markets and erode overseas demand for copper, Chile’s biggest export. At the same time, policy makers at last month’s meeting only discussed keeping the rate unchanged, according to the minutes published Oct. 3.

“There hasn’t been an external crisis yet that makes an immediate reduction necessary, but undoubtedly it will come,” Matias Madrid, chief economist at Banco Penta in Santiago, said by telephone. “Now they’ll introduce a negative bias, preparing the way to reduce the rate in November.”

As Chile’s $200 billion economy rebounded from the 2009 recession and last year’s 8.8-magnitude earthquake, policy makers raised their key rate 13 times in 14 months before voting to hold borrowing costs unchanged at the July 14 meeting.

Prices, Expectations

Since then, the central bank has kept borrowing costs unchanged and one-year rate swaps, which reflect traders’ views of future interest rates, declined 117 basis points, or 1.17 percentage points, to yesterday’s 4.45 percent. Swaps fell to 4.43 percent at 9:10 a.m. Santiago time today.

Policy makers may reduce the benchmark rate to 4.5 percent within six months after keeping borrowing costs unchanged today, according to the median estimate of traders and investors in an Oct. 12 central bank survey.

Annual inflation quickened to 3.3 percent in September from 3.2 percent a month earlier, above the central bank’s 3 percent target, as consumer prices rose 0.5 percent. A monthly central bank survey published yesterday showed that economists expect prices to rise 0.3 percent this month.

Inflation expectations also have declined since July 14 as commodity prices have slumped on concern that a global economic slowdown could damp demand for raw materials.

One-year breakeven inflation, which reflects traders’ views of average price increases and is derived by the difference between nominal and inflation-linked yields, declined 74 basis point, or 0.74 percentage point, from July 14 to yesterday. Breakeven inflation rose 1 basis point to 2.37 percent at 9:10 a.m. from yesterday.

Chile’s inflation-adjusted interest rate at 1.95 percent is the second highest in Latin America after Brazil at 4.69 percent.

Growth Horizon, Policy

Bloomberg’s commodity index, which calculates the mean of indexes including energy, grain, food and precious metals and livestock, declined 9.7 percent over that period. The price of copper, which accounts for more than half of Chilean exports, fell 25 percent.

Economic growth will decelerate next year from 2011 as Chile and other emerging markets feel the impact of a slowdown in developed economies, De Gregorio told senators Sept. 7.

Gross domestic product, which grew 10 percent year on year in the first quarter of 2011 followed by a 6.8 percent expansion in the second quarter, will expand 6.25 percent to 6.75 percent in 2011 and 4.25 percent to 5.25 percent next year, according to central bank forecasts.

Policy makers are “very happy” with monetary policy at the moment, and with interest rates at their highest level since January 2009 in some ways are better prepared than they were in 2008 after Lehman Brothers Holdings Inc. collapsed, central bank board member Rodrigo Vergara said Sept. 28.

‘Tools,’ ‘Proactive’

“The central bank has all the tools, the will and the space to act, and to act broadly and even aggressively if necessary,” Vergara said in an interview from his offices in Santiago. “There’s a danger in reacting too fast, but there’s also a danger in reacting too slowly.”

To be sure, policy makers may surprise the market and act faster than they did in the previous global crisis by reducing rates today to stimulate growth, Cesar Guzman, head of macroeconomic research at Inversiones Security, said in an Oct. 11 note to investors.

Four months after Lehman Brothers’ bankruptcy, Chile’s central bank changed policy and cut rates after keeping them unchanged for three straight meetings at 8.25 percent.

“We estimate that the ‘experience’ won by the central bank in the 2008 crisis will lead it to be more proactive, putting itself ahead of the data and averting at all cost a more adverse scenario in the local market,” Guzman said. “The central bank is ready to reduce the monetary policy rate.”

--Editors: Robert Jameson, Philip Sanders

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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