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Chile Probably Will Hold Key Rate as Growth Defies Global Woes

November 12, 2012

Chile’s central bank probably will keep its key interest rate unchanged for the 10th straight month today as the world’s top copper miner posts the lowest inflation and some of the fastest growth in Latin America.

The policy board, led by bank President Rodrigo Vergara, will keep the target overnight rate at 5 percent, according to all 14 analysts surveyed by Bloomberg. The bank, which last changed interest rates in January with a quarter-point cut, will announce its decision after 6:00 p.m. in Santiago.

Chile’s economy is being pulled in two directions as the global slowdown erodes export revenue while rising domestic demand fuels retail sales and imports. Policy makers as a result are unlikely to either cut or raise rates for the rest of the year, said Benjamin Sierra, an economist at Scotiabank Chile.

“There are just too many good reasons for policy makers to keep their arms folded for the moment,” Sierra said by phone from Santiago yesterday. “There is very strong tension between internal activity, which remains strong, and external risks.”

One-year interest-rate swaps, which reflect traders’ views of average borrowing costs, increased 7 basis points, or 0.07 percentage point, to 4.99 percent yesterday from the end of last month. Economists surveyed yesterday by the central bank forecast no change in interest rates for the next 23 months.

Chile has the highest borrowing costs among major rate- setting nations in Latin America behind Brazil, which has cut its benchmark interest rate from 12.5 percent last year to a record-low 7.25 percent.

At the same time, Chile’s 2.9 percent inflation rate in October was the lowest among major Latin American nations tracked by Bloomberg. Policy makers in the Andean nation target 3 percent inflation, plus or minus 1 percentage point over two years.

Inflationary Pressures

Inflationary pressures remain a threat in the medium term as Chile nears full employment, with a 6.5 percent jobless rate in the third quarter, Vergara told an economic forum in Santiago last week.

Retail sales increased 8.4 percent in the first nine months of 2012 from last year, surpassing economic growth of 5.4 percent in the period, according to calculations made by Bloomberg based on government and central bank data. Gross domestic product will climb 5 percent in 2012, the fastest gain in South America behind Peru, according to analysts polled by Bloomberg.

Soaring domestic demand pushed the current account into a deficit of $2.4 billion in the second quarter compared with a $406 million surplus in the year-ago period.

“If the current account deficit grows or persists more, odds also increase that a deterioration of the external scenario would impact internal conditions with more force,” Vergara said last week. “It’s everybody’s task to moderate spending.”

Signs of Easing

Robust retail and construction growth has helped shares in the shopping center developer Parque Arauco SA gain 30 percent this year, while Besalco SA, a construction and engineering company, has risen 24 percent.

Now, growth is starting to show signs of easing as sales abroad slow on weaker copper prices and lower demand for other exports. President Sebastian Pinera, who has a doctorate in economics from Cambridge, Massachusetts-based Harvard University, said in a radio interview yesterday his biggest concern is that Europe’s sovereign-debt crisis will further affect his nation’s economy.

Chile’s trade surplus fell by more than $6.4 billion to $2.9 billion in the first 10 months of 2012 from last year on a 4 percent decline in exports and 6.4 percent gain in imports, according to central bank data.

The average price of copper, which accounts for more than half of Chile’s exports, is down 9.4 percent this year from the average for 2011. Manufacturing output dropped 5.6 percent in September from 2011, the steepest decline since the aftermath of the 8.8-magnitude earthquake that struck south-central Chile in 2010.

“If pressed to say where the biggest threats come from, there are more threats abroad than at home,” policy maker Joaquin Vial said in an interview last week.

To contact the reporter on this story: Randall Woods in Santiago at

To contact the editor responsible for this story: Joshua Goodman at

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