Bloomberg News

Chile and Peru Keep Rates Unchanged to Gauge Extent of Slowdown

June 14, 2013

Chile and Peru left their benchmark interest rates unchanged yesterday as policy makers expect growth to accelerate after slowing in the first quarter.

Chile’s central bank left its key rate at 5 percent for the 17th consecutive month, while Peru kept its benchmark rate at 4.25 percent for a 25th month, matching Malaysia for the longest pause in developing countries. Both decisions were expected by analysts surveyed by Bloomberg.

Economic growth slowed in both nations in the first quarter as declining copper prices damped exports and crimped an investment boom that made them among the fastest expanding economies in Latin America last year. With inflation below the target range in Chile and within the target band in Peru, policy makers have room to cut rates should signs of weaker demand become clear, said Felipe Hernandez, an analyst at RBS Securities Inc.

“Until we see some signs of moderation in Chile’s labor market, the central bank will remain cautious,” Hernandez said by phone from Stamford, Connecticut. “Peruvian officials still sound very constructive and bullish so they will wait for more evidence of a slowdown before cutting.”

Chile’s economy grew 4.1 percent in the first quarter from the year earlier, down from 5.7 percent in the previous three months, while Peru’s growth slowed to 4.8 percent from 5.9 percent.

Cut Debate

Copper, the largest export for both Chile and Peru, has fallen 13 percent in New York this year, deterring investment and damping growth.

That slowdown and the lowest inflation rate in Latin America mean Chilean policy makers probably will cut the key rate to 4.75 percent next month, economists surveyed by the central bank forecast this week.

Chile’s central bank debated the possibility of a rate cut at last month’s meeting, before deciding that strong demand justified leaving rates on hold, according to the minutes of the discussion released on June 3. Minutes from yesterday’s meeting will be published June 28.

Retail sales leaped 11.2 percent in April from the year earlier, the fastest pace since August, even as manufacturing growth stagnated and a four-year decline in unemployment slowed.

Peru Outlook

In Peru, policy makers expect gross domestic product to rise 6.4 percent in the second quarter, and increase 6.1 percent this year, bank President Julio Velarde said in Congress on June 5. First quarter growth of 4.8 percent was the slowest in more than three years.

A deceleration in credit growth led the central bank to reduce the reserve ratio for some lenders this month by establishing a 20 percent ceiling. Velarde said in a June 6 interview the move was “slightly expansive” and was prompted by concern that the economy was slowing.

Jorge Pastrana, an economist at Citigroup Inc., wrote in a June 10 report that Peru’s economic slowdown may not be temporary and that the central bank will cut its key rate 50 basis points, or 0.5 percentage point, to 3.75 percent this year. The timing depends on when the slowdown “becomes evident,” he wrote.

Chile’s Imacec index, a proxy for GDP, grew 4.4 percent in April from the year before, less than the 5 percent forecast by analysts, even though the month contained two more working days than in 2012. Economic activity expanded 3 percent in March, the slowest pace in 20 months.

Subdued Inflation

Inflation is also weakening. Chilean prices rose 0.9 percent in the year through May, the least since April 2010 and compared with 2 percent in Colombia and 4.63 percent in Mexico. Chile targets inflation of 3 percent, plus or minus one percentage point.

Peru’s annual inflation rate has fluctuated between 2.3 percent and 2.6 percent for the past four months, and will end the year at close to 2 percent, according to the central bank. Policy makers target inflation of 2 percent plus or minus one percentage point.

“In Peru we’ve seen a deceleration in the foreign sector, but not in internal demand, so the central bank isn’t convinced that it has to do something yet,” Roberto Melzi, head of fixed income investment strategy at Peruvian pension fund manager AFP Integra SA, said by phone from Lima. “In Chile the most recent retail sales surprised to the upside and that is consistent with a view of leaving rates unchanged.”

To contact the reporters on this story: Philip Sanders in London at psanders@bloomberg.net; John Quigley in Lima at jquigley8@bloomberg.net

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


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