Chile Maintains Key Rate at 5.25 Percent as Economy Resists Global Turmoil

Chile’s central bank kept its benchmark interest rate unchanged for the fifth straight month as global economic turmoil shows little sign of damping growth or easing price pressures in the world’s top copper producer.

The five-member policy board, led by Jose De Gregorio in what may be his last meeting as bank president, held the overnight rate at 5.25 percent today, as forecast by all 16 economists surveyed by Bloomberg. De Gregorio’s term ends Dec. 9 and a replacement has yet to be named.

After raising its key rate faster than any major economy behind Belarus in the first half, Chile has space to stimulate growth if the European debt crisis deteriorates further. Still, policy makers will be reluctant to react until the global decline begins to damp local growth and prices, said Banco Bilbao Vizcaya Argentaria SA economist Alejandro Puente.

“Although uncertainty continues in Europe, an adverse effect hasn’t yet materialized in Chile’s real economy,” Puente said today. “They don’t have space to reduce rates, and we don’t think they will for the remainder of this year.”

Policy makers will lower the key rate to 4.75 percent by April after keeping it at 5.25 percent in December, according to the median estimate of 61 economists in a Nov. 9 central bank survey.

The global economy may worsen and impact Chile’s growth and inflation rates, prompting a change in the orientation of the central bank’s monetary policy, according to a statement accompanying today’s decision.

Inflation Target

Inflation probably will exceed the central bank’s forecast this year of 3.3 percent after consumer prices rose an annual 3.7 percent in October, the fastest gain since April 2009, Puente said. The central bank targets 3 percent inflation, plus or minus 1 percentage point over a two-year horizon.

“Headline inflation has been somewhat higher than expected because of the incidence of fuels and food,” the central bank said.

The economy expanded 5.7 percent in September on gains in the retail and fishing industries, compared with the 5.2 percent median estimate in a Bloomberg survey of 14 analysts.

“Robust September economic activity data and relatively elevated consumer-price pressures in October provide little reason for Chile’s central bank to rush to cut rates,” Florencia Vazquez, an economist at BNP Paribas, said in a Nov. 8 note e-mailed to investors. “We expect the central bank to start easing in the first quarter.”

Slowing Down

Chile’s economic growth, which was 8.4 percent in the first half of 2011, is starting to moderate to rates nearing its long- term trend of 5 percent and remains vulnerable to shocks from the European crisis, De Gregorio said in an Oct. 19 speech in Santiago.

Brazil, Latin America’s largest economy, reduced its key interest rate 50 basis points in each of its last two meetings to 11.50 percent, citing a need to mitigate the impact of a global economic slowdown.

Elsewhere in the region, Peru’s central bank last week kept its benchmark rate at 4.25 percent for a sixth month, Colombia left its overnight rate unchanged for a third straight meeting on Oct. 28, while Mexico has been on hold since July 2009.

“We are paying close attention to external developments and we have the flexibility to act whenever necessary,” De Gregorio said on Oct. 19. “The focus is now on the effects that the weak global economy will have on the Chilean economy, especially on growth and inflation.”

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

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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