Bloomberg News

Chile Unexpectedly Cuts Rate to 5% on Global Growth Slowdown

January 12, 2012

(Updates with comments from central bank statement in fifth, eighth and 13th paragraphs.)

Jan. 12 (Bloomberg) -- Chile’s central bank unexpectedly cut its benchmark interest rate for the first time in more than two years as growth in the world’s leading copper producer shows signs of slowing.

The four-member policy board, led for the second time by bank President Rodrigo Vergara, reduced the overnight rate by a quarter-point to 5 percent today, matching the forecast of four of 20 analysts surveyed by Bloomberg. Sixteen expected policy makers to keep rates unchanged for a seventh straight month.

Chile joins Brazil in cutting interest rates to boost growth, even after inflation in the Andean nation exceeded the upper limit of central bank’s target in December. With the highest borrowing costs among major rate-setting economies in Latin America, the two countries have space to keep stimulating growth if the European sovereign-debt crisis deteriorates.

The impact on the Chilean economy is “already taking place and opens space to cut rates,” Cristobal Doberti, chief economist at Santiago-based Bice Inversiones, said by phone today. “We expect three quarter-point cuts in the first quarter, which is a moderate rather than aggressive reduction.”

Additional changes to the benchmark interest rate will depend on internal and external economic conditions and their impact on Chilean inflation, the central bank said in a statement accompanying today’s decision.

Rate Forecasts

Policy makers will lower the key rate to 4.5 percent by June and to 4.25 percent by the end of the year, according to the median estimate of 60 economists in a Jan. 10 central bank survey.

According to the same survey, the economy will expand 4 percent in December from the year earlier, matching growth seen in November, while gains in gross domestic product will moderate to 4 percent this year from 6.2 percent in 2011.

“On the local front, economic activity and internal demand have evolved in line with projections,” the bank said in today’s statement.

Chile’s Finance Minister Felipe Larrain, a non-voting participant of central bank meetings, last week told reporters a rate reduction would be “reasonable” in January.

“It’s evident the Chilean economy is decelerating,” he said. “We’re still growing, but at a lower rate than the first half of last year. The effects of the external crisis have affected us somewhat.”

The price of copper, Chile’s largest export, declined 21 percent last year and industrial production in October fell for the first time since the aftermath of the 8.8-magnitude earthquake in February 2010.

Inflation Accelerates

Larrain’s comments came before the statistics agency reported that consumer prices jumped a greater-than-expected 0.6 percent in December, pushing annual inflation to 4.4 percent, the fastest pace since April 2009.

“Headline and core inflation in December were higher than expected because of the prices of perishables and other food,” the bank said in today’s statement. “Inflationary expectations remain around the target.”

A report by the central bank’s research department yesterday said December’s jump in prices largely reflected short-term factors such as gains in fruit and vegetables as well as the impact of a weaker peso. The bank estimates inflation will slow to 2.7 percent this year.

Economists including Alejandro Puente at Banco Bilbao Vizcaya Argentaria SA in Santiago changed their forecast from a rate cut to another hold in January after the December inflation report. Policy makers target 3 percent inflation, plus or minus one percentage point.

The peso strengthened 1.2 percent to 499.89 per U.S. dollar today. The Chilean currency has gained 3.9 percent so far this month, trailing the Colombian peso and the Brazilian real.

--With assistance from Eduardo Thomson and Matthew Craze in Santiago and Ainhoa Goyeneche in Madrid. Editors: Philip Sanders, Harry Maurer

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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