Bloomberg News

Chile Keeps Key 5.25% Rate as Inflation Outweighs Europe Crisis

December 13, 2011

Dec. 13 (Bloomberg) -- Chile’s central bank kept its benchmark interest rate unchanged for the sixth straight month as slowing global growth shows little sign of damping inflation and demand in the world’s biggest copper producer.

The four-member policy board, led for the first time by new bank President Rodrigo Vergara, held the overnight rate at 5.25 percent today, matching the forecast of 16 of 20 analysts surveyed by Bloomberg. Four expected a 0.25-point cut.

After raising interest rates faster than any major economy behind Belarus in the first half, Banco Central de Chile has space to stimulate growth if the European debt crisis causes internal consumption and consumer price gains to slow. Still, after inflation quickened for the fourth straight month in November to threaten their annual target, policy makers had little choice but to keep the rate unchanged.

“There still are some significant inflationary pressures, and in addition there aren’t clear indications of a deceleration in domestic demand,” Alejandro Puente, an economist at Banco Bilbao Vizcaya Argentaria SA in Santiago, said by phone. “A rate reduction doesn’t seem prudent yet. The central bank must wait until there’s more evidence that the international scenario is having a negative impact on Chile.”

Policy makers will lower the rate to 5 percent in their next meeting and 4.5 percent by May as economic growth slows from 6.2 percent this year to 4.2 percent in 2012, according to the median estimate of 61 economists in a Dec. 9 central bank poll.

‘Stubbornly Elevated’ Inflation

According to the same survey, inflation will slow by 1 percentage point by next November from 3.9 percent last month, which was the highest rate seen since April 2009. The central bank targets 3 percent inflation, plus or minus 1 percentage point over two years.

“Stubbornly elevated” inflation supported expectations that the bank would keep its rate on hold this month, Florencia Vazquez, an economist at BNP Paribas, said in a Dec. 7 note e- mailed to investors.

After posting year-on-year growth of 5.7 percent in September, the economy eased to a weaker-than-forecast 3.4 percent expansion in October, the slowest pace since the aftermath of the February 2010 earthquake that caused $30 billion damage in the $203 billion economy.

“Economic activity was soft in October, but the weakness reflected specific one-off effects and a partial reversal may be seen in coming months,” Vazquez said.

Retail sales, which expanded 8.6 percent in October, offset a drop in industrial output while unemployment in the month unexpectedly fell to 7.2 percent from 7.4 percent in September.

‘No Evidence’

“There are signals that there is a deceleration, but we have no evidence that it has been stronger than what we were expecting,” Manuel Marfan, the central bank’s vice president, said in an interview last week. “The economy has all the signals that it is still in the neighborhood of full employment and potential output.”

Peru’s central bank last week also kept its benchmark rate unchanged after consumer prices climbed faster than estimated.

Elsewhere in the region, Colombia in November raised its benchmark rate for the first time since July on economic growth that could be the fastest in Latin America next year, according to the median estimate of 10 analysts surveyed by Bloomberg.

Brazil, which is Latin America’s largest economy, reduced its key interest rate 50 basis points in each of its last three meetings to 11 percent, citing a need to mitigate the impact of the global economic slowdown.

Chile’s peso declined 3.2 percent against the U.S. dollar in the month through yesterday, the second-worst performance among major Latin American currencies after Brazil.

--Editors: Robert Jameson, 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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