Bloomberg News

Chile Rejected Rate Change on Balanced Global, Domestic Risk

February 01, 2013

Chilean policy makers were unanimous in their decision to keep the benchmark interest rate unchanged last month on improved financial conditions abroad and higher wages and falling unemployment at home.

The central bank last changed borrowing costs in January 2012, when it made a quarter-point reduction that surprised economists surveyed by Bloomberg. Policy makers didn’t discuss changing rates in the latest meeting, according to the minutes posted on the bank website today.

The central bank board last discussed raising borrowing costs in their May meeting. They have ruled out rate changes for 12 straight months as inflation eases, domestic demand surges and the peso gains against the U.S. dollar.

“A board member indicated that, in the current context, the most prudent decision in the short term was to keep the monetary policy rate at its current level,” according to the minutes. “Risks in the global economy remained present while local risks, in his opinion, had increased.”

Analysts surveyed Jan. 9 by the bank forecast rates will remain on hold in the next five months before rising by December.

The peso, which has gained 1.6 percent against the U.S. dollar in the past three months, fell by less than 0.1 percent to 471.45 per dollar at 8:58 a.m. local time.

While Chile has the highest real borrowing costs among major rate-setting central banks in Latin America, its gross domestic product probably expanded at the fastest pace in the region behind Peru last year, according to analysts surveyed by Bloomberg. GDP growth will ease this year, climbing 4.5 percent after increasing 5.45 percent in 2012, according to the poll.

At 1.5 percent, Chile has the lowest inflation rate in the region. Policy makers in the Andean nation target 3 percent inflation, plus or minus 1 percentage point over two years.

“Despite the exuberance of demand against a backdrop of a closed output gap, the central bank is unlikely to hike in the near term given benign below-target inflation and growing concerns with the Chilean peso’s strength,” Alberto Ramos, an economist at Goldman Sachs Group Inc., wrote in a report e- mailed to investors yesterday.

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

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net.


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