Bloomberg News

Chile Probably Will Hold 5% Rate as Growth Pressures Inflation

April 17, 2012

A worker transports rocks at the El Teniente copper mine, owned and operated by Corporacion Nacional del Cobre de Chile (Codelco), near Rancagua, Chile. Photographer: Morten Andersen/Bloomberg

A worker transports rocks at the El Teniente copper mine, owned and operated by Corporacion Nacional del Cobre de Chile (Codelco), near Rancagua, Chile. Photographer: Morten Andersen/Bloomberg

Chile’s central bank probably will keep the benchmark interest rate unchanged for a third straight month today after raising its forecasts for inflation and economic growth in the world’s top copper producer.

Policy makers, led by central bank President Rodrigo Vergara, will keep the overnight rate at 5 percent, according to 18 of 19 analysts surveyed by Bloomberg. One economist forecast a quarter-point increase to 5.25 percent. The bank will announce its decision after 6:00 p.m. local time.

The bank raised its inflation and growth forecasts this month after price increases surpassed the upper limit of the bank’s target range in December, January and February and growth exceeded analyst forecasts twice in the past three months. Scotiabank Chile economist Benjamin Sierra said the higher forecasts and “hawkish” tone taken by policy makers at the March meeting make a second rate cut in 2012 unlikely.

“These guys have no intention of moving the rate from where it is,” Sierra said by telephone from Santiago. “It would be madness to think of reducing the rate now.”

Economists polled monthly by the central bank have changed their outlook from a February forecast for a rate reduction in the next 11 months to an April estimate for increases over the same time frame. One-year interest rate swaps, which reflect traders’ view of borrowing costs, climbed to 5.24 percent yesterday from 4.68 percent on Feb. 14.

The bank targets inflation of 3 percent with a 1 percentage point margin of error over a two-year horizon.

Changing Stance

Policy makers at last month’s meeting only considered keeping rates unchanged after debating a quarter-point reduction in February, minutes of the meeting show.

“All the board members expressed their concern about the inflation outlook,” policy makers said, according to the minutes published on the bank’s website March 30. “However, they also agreed that the risks from the external scenario remained significant.”

The central bank on April 3 raised its 2012 inflation forecast to 3.5 percent from the 2.7 percent estimate made in December. Inflation in March eased to 3.8 percent, less than analysts had forecast, from 4.4 percent the month before.

Policy makers on April 3 also raised estimates for gross domestic product growth this year to a range of 4 percent to 5 percent from the previous forecast for a 3.75 percent to 4.75 percent.

Economic growth, measured by the bank’s Imacec index that acts as a proxy for GDP, surged 6.9 percent in December from the previous year, 5.5 percent in January and 6.1 percent in February.

Regional Strength

The Andean nation’s expansion is set to exceed global growth, which is forecast by the central bank at 3.3 percent this year. GDP growth among Chile’s trading partners will be 3.8 percent, the bank forecasts.

Chile’s economic surge is part of a regional trend, with Peru’s economy expected to grow 5 percent this year, according to a Bloomberg survey of analysts, and Colombia’s government forecasting an expansion of more than 5 percent.

Latin American central banks have taken a mixed approach to weakening global growth, with Brazil cutting rates, Mexico keeping them on hold and Colombia raising twice in the year to date. Chile has the third-highest borrowing costs of major rate- setting economies in the region after Brazil and Colombia.

Policy makers in Latin America should take steps to sustain liquidity if global financial instability resumes rather than cutting borrowing costs to boost demand, according to the International Monetary Fund’s top official for the region.

“Economies have enough stamina to grow at about potential growth without idle capacity,” Nicolas Eyzaguirre, director of the fund’s Western Hemisphere department, said in an April 12 interview. “Central banks should be very careful not to over- stimulate the economy.”

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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