Bloomberg News

Chile Keeps 5% Rate as Policy Makers Trapped in ‘Sweet Spot’

February 14, 2013

Chile kept the key interest rate unchanged today for a 13th straight month as the central bank maintains Latin America’s slowest inflation with the region’s second-fastest growth rate.

Policy makers, led by bank President Rodrigo Vergara, held the benchmark rate at 5 percent, as forecast by all 17 analysts surveyed by Bloomberg. The bank last changed borrowing costs in January 2012 with a quarter-point reduction that surprised economists.

With economic growth beating analyst estimates in nine of the past 12 months, while inflation remains below the target range, Chile has little need to change borrowing costs, said Alberto Ramos, an economist at Goldman Sachs Group Inc. Traders in the interest rate swap market forecast borrowing costs may remain on hold in the first half of this year.

“This is a central bank that to be honest does not have that much to worry about,” Ramos said by phone from New York before today’s decision. “As far as we can see, they are trapped in a sweet spot.”

Two-year rate swaps, which reflect traders’ views of average borrowing costs, declined one basis point, or 0.01 percentage point, to 5.22 percent yesterday from the end of last month. That indicates traders expect the key rate to rise a quarter-point to 5.25 percent by August, according to calculations by Banco de Chile.

No Pressure

The central bank is under no great pressure to raise rates because inflation has remained below the lower limit of the central bank’s 2 percent to 4 percent target range for two straight months after starting last year above the band, Rodrigo Aravena, chief economist at Banchile Inversiones, said Feb. 11.

Traders and investors surveyed Feb. 12 by the central bank estimated inflation will accelerate to 3 percent in a year from 1.6 percent in January, staying at the mid-point of the target range through February 2015.

“We don’t yet see the kind of pressure that would justify a rate increase,” Aravena said by phone from Santiago. “The central bank must be sure of several things before it raises the interest rate. In the first place, it must be sure inflation projected out two years from now will be above 3 percent.”

At 3.4 percent, Chile has the highest inflation-adjusted borrowing costs in the world after Ukraine, which has 7.7 percent, and China, at 4 percent, according to data compiled by Bloomberg. Chile’s real borrowing costs are more than three times higher than those of Brazil, Latin America’s largest economy.

Economic Growth

High real interest rates haven’t curbed economic growth. Unemployment fell to 6.1 percent at the end of 2012 from 6.6 percent a year earlier, while wages climbed 4.7 percent above inflation in December -- the fastest gain in three years.

“Domestically, recent output and demand indicators exceeded forecasts,” the central bank said in a statement accompanying today’s decision. “The labor market is still tight.”

Chile’s economy grew 5.45 percent last year, according to analysts surveyed by Bloomberg, compared with 6.2 percent in Peru and 1 percent in Brazil.

In December, Chile’s economy expanded a seasonally-adjusted 1.2 percent in the month, the second-fastest rate in 2012, on gains in retail and services. Internal demand is driving gains, with retail spending climbing 8.8 percent in 2012 and supermarket sales rising 7.4 percent.

Raising interest rates to cool that growth would put pressure on the peso, which has appreciated 3 percent against the U.S. dollar in the past three months, Ramos said. On the other hand, any temptation to reduce borrowing costs will be tempered by concern that easing monetary policy would stimulate an economy that doesn’t need an additional boost, he said.

“There is nothing that looks imminent on the rates front, unless you see the macro reality shifting,” Ramos said.

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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