Chile’s central bank probably will keep the benchmark interest rate unchanged today after a pick-up in inflation and economic growth closed the door on a repeat of January’s surprise rate cut.
Policy makers, led by central bank President Rodrigo Vergara, will keep the overnight rate at 5 percent for the second consecutive month, according to all 17 analysts surveyed by Bloomberg. The bank will announce its decision after 6:00 p.m. local time.
Europe’s debt crisis and five interest rate increases last year haven’t tamed inflation, which has exceeded the central bank’s target range for three consecutive months. With inflation expectations rising, the central bank may increase borrowing costs before year-end, said Sebastian Cerda, Santiago-based chief economist at CorpResearch SA.
“Cuts are unlikely for the rest of the year because economic activity has been faster than forecast and higher inflation has started to appear,” Cerda said in a telephone interview. “Rate increases are possible in the second half of the year, although that isn’t yet a certainty.”
One-year breakeven inflation, the gap between nominal and inflation-indexed yields, widened to 3.54 percent today from 3.06 percent when the central bank last met Feb. 14. The central bank targets inflation of 3 percent, plus or minus 1 percentage point over two years.
Traders and investors surveyed by the central bank on March 13 forecast rates will remain unchanged for six months, before rising to 5.25 percent by March 2013. They had forecast a rate cut by June in the Feb. 21 poll. A separate survey of economists this week also forecast no change in rates in 2012.
Latin American central banks have taken a mixed approach to accelerating inflation and the European debt crisis, with Brazil cutting rates, Mexico keeping them on hold and Colombia opting for increases. Policy makers must focus their efforts on keeping inflation close to target, Min Zhu, deputy managing director of the International Monetary Fund, said March 1.
“Inflation expectations remain relatively well anchored in most countries, allowing some countries to put monetary policy on hold during the period of global uncertainties,” Min said in prepared remarks for a forum in Punta del Este, Uruguay. “Some of the slowdown in South America is welcome, as it will help fend off remaining overheating pressures.”
Chile’s inflation rate rose to 4.4 percent in February from 4.2 percent in January. Inflation was 4.4 percent in December, the highest level since April 2009.
Economic growth is picking up at the same time, reaching an annual pace of 5.5 percent in January, compared with 5.3 percent in December and 4 percent in November. Also in January, the unemployment rate remained at a lower-than-forecast 6.6 percent and wages surged 6.7 percent from the previous year.
“Economic growth has recovered in recent months and is currently close to potential (or even above according to some gauges),” Florencia Vazquez, an economist at BNP Paribas, wrote in a note e-mailed to investors March 5. “The sharp improvement seen recently increases the likelihood that Chile’s central bank will remain on hold this month.”
The Imacec index, which is a proxy for gross domestic product, rose 6.3 percent in 2011. GDP growth will slow this year, with the economy expanding 3.75 percent to 4.75 percent, the central bank said in its quarterly monetary report Dec. 20.
Economists have raised growth forecasts since the Imacec started to accelerate in December. Economists surveyed this month by the central bank raised their 2012 economic growth estimate to 4.4 percent from 4.1 percent in February and 4 percent in January.
“We’re in a phase of deceleration that is somewhat softer than what was forecast some months ago,” Finance Minister Felipe Larrain told reporters in Santiago March 5. “We have to closely follow what’s happening abroad because a good performance in one month doesn’t guarantee that we’re going to continue like that for the rest of the year.”
The peso rose 0.9 percent to 482.25 per U.S. dollar today.
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