Bloomberg News

Chile Keeps 5% Key Rate on Sustained Growth and Easing Prices

August 16, 2012

Chile’s central bank today kept its benchmark interest rate unchanged for a seventh straight month as inflation in the world’s top copper producer eased and economic growth exceeded estimates made by economists.

The policy board, led by bank President Rodrigo Vergara, held the key interest rate at 5 percent, as forecast by all 17 analysts surveyed by Bloomberg. Policy makers last changed borrowing costs in January with a quarter-point reduction.

Chile boasts the lowest inflation among Latin America’s major economies even as it’s on track to exceed the region’s average economic growth rate this year. Barring a deterioration of the external economy that exceeds estimates, Chile’s central bank will keep rates unchanged for the remainder of this year and next, economist Felipe Jaque said by phone from Santiago.

“The balance of risks to the local economy compared with external risks coming from Europe, the U.S. and China justify a hold in the medium term,” Banco Bilbao Vizcaya Argentaria SA (BBVA)’s Jaque said Aug. 14. “The central bank only would make cuts if it had clear evidence of contagion. Cuts wouldn’t be minor; they’d be pretty significant.”

Economists polled by the central bank on Aug. 9 expected rates to remain unchanged at 5 percent for at least 23 months, while traders and investors surveyed separately two days earlier forecast a quarter-point cut by February next year.

Along with Colombia, Chile has the highest borrowing costs among rate-setting nations in Latin America behind Brazil. Brazil and Colombia both reduced their key rates in their latest meetings as their economies show signs of cooling. Brazil’s industrial output in June contracted and consumer confidence fell, while Colombia’s central bank last month lowered its 2012 growth forecast to a range of 3 percent to 5 percent.

Economic Growth

Chile’s economy grew 6.2 percent in June, exceeding the median forecast of analysts surveyed by Bloomberg for a 5.2 percent increase. Gross domestic product increased 5.6 percent in the first quarter from last year and grew 5.4 percent in the second, according to all four analysts surveyed by Bloomberg. The central bank is scheduled to report on second quarter growth on Aug. 20.

Unemployment fell to 6.6 percent in the second quarter from 7.2 percent the year earlier, while wages climbed an annual 6 percent in June.

South America’s fifth-largest economy will expand 4.9 percent this year after growing 6 percent in 2011, surpassing the Latin American average of 3.7 percent growth, according to forecasts by the United Nations’ economic unit for the region in June.

Copper Prices

“Our economy will decelerate, although at a slower pace than the vast majority of countries,” Finance Minister Felipe Larrain told an economic forum in Santiago Aug. 9. “It’s impossible that an economy immersed in a globalized world isn’t going to be affected.”

Chile this week lowered its forecast for average copper prices as demand in the U.S. and Europe weakens. State copper commission Cochilco cut its 2012 forecast to $3.52 a pound from $3.85, and trimmed next year’s estimate to $3.48 a pound from $3.75. The metal accounts for more than half of Chile’s exports.

Falling commodity prices have helped reduce Chile’s inflation rate, which has declined in each of the past five months, reaching 2.5 percent in July -- the lowest level in 20 months. Policy makers target 3 percent inflation, plus or minus 1 percentage point over two years.

Still, Chile’s economic expansion and growing labor market threaten to put pressure on consumer prices, Vergara said Aug. 7. Policy makers forecast inflation rates will rise to 2.7 percent by the end of this year.

“In the medium term, inflationary risks are still present,” he said. “So long as the economic scenario remains between two forces, monetary policy must be prudent and transparent in terms of explaining its decisions. Acting hastily only will reduce its capacity to act.”

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net.


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