Oct. 13 (Bloomberg) -- Chile’s central bank will probably keep its benchmark interest rate at a record low in a bid to safeguard a nascent economic rebound amid tame inflation.

Policy makers meeting today will keep the benchmark rate at 0.5 percent for a third month, according to all 10 economists surveyed by Bloomberg. Central bank President Jose De Gregorio last week said that the bank’s five-member board will likely maintain its current rate until the second quarter of 2010.

The bank’s president said he plans to hold borrowing costs down in an effort to stoke an economic expansion above 4.5 percent, which would likely push inflation back up toward policy makers’ 3 percent target. Prices fell 1.1 percent in the 12 months through September, the steepest decline since the 1930s, after the cost of energy dropped and the economy shrank.

“Inflation is negative and no one expects much inflation in coming months,” said Julio Espinoza, an economist at Banco Bice SA in Santiago. “If things change, the bank may raise rates sooner, maybe in March, but it’s difficult to see it happening before then.”

Beyond setting the benchmark rate today, board members may decide to shorten the maturity of cheap six-months loans the bank has been offering to lenders since July, according to economists including Espinoza and Jimena Zuniga at Barclays Capital in New York.

‘Extraordinary’ Measures

Trimming the duration of the longest loans available to 90 days or 150 days from the current 180 days would give De Gregorio greater freedom to act, Zuniga said.

The 180-day loans, for which the bank charges the overnight rate, represent a “commitment and conviction” that the rate will remain low, De Gregorio said in July. It would be bad business for the bank to raise its overnight rate while cheaper loans were still outstanding, he said.

“The withdrawal of the extraordinary liquidity measures will be sooner rather than later,” said Juan Eduardo Coeymans, an economics professor at the Pontifica Universidad Catolica de Chile. “When they start to raise the rate depends on the economy.”

Chile’s economy shrank in the first two quarters of this year after prices for its exports, led by copper, plunged and domestic demand evaporated.

Companies reacted to uncertainty by running down their inventories to historical lows, selling stock and emptying warehouses, Finance Minister Andres Velasco said Oct. 6.

Trend, Targets

After ramping up the cost of borrowing to a 10-year high last year as inflation reached 9.9 percent, the central bank lowered its overnight rate by 7.75 percentage points this year, a reduction matched only by Turkey.

Chile’s consumer prices will probably fall 0.8 percent this year as gross domestic product contracts 1.6 percent, the government’s budget office said Oct. 7.

The shrinking economy has opened up a gap between actual output and potential output, the central bank argued in a monetary policy report last month.

Chile’s economy can probably grow 4 percent to 4.5 percent next year without generating inflation, so the bank will probably set policy to target a growth rate faster than that to help inflation return toward its target over the next two years, it said in the report.

“With negative inflation and trying to bring back inflation to our target, we have an extremely expansionary monetary policy,” De Gregorio said in Oct. 5 interview from Istanbul.

2010 Growth

Pushing for growth faster than 4.5 percent is the “only coherent way to close the quite substantial output gap and bring inflation back toward the target,” he said.

The economy may grow 5 percent in 2010 as companies ramp up hiring and output, Velasco said Sept. 30.

The central bank forecasts growth of as fast as 5.5 percent next year, which would be mostly due to its efforts to keep borrowing cheap, De Gregorio said. Recovering inventories aren’t a good engine for prolonged growth, he said.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

Last Updated: October 12, 2009 23:00 EDT