Chile May Keep 5.25% Rate as Europe Crisis Fails to Slow Domestic Demand

Chilean policy makers probably will keep their benchmark interest rate unchanged today as Europe’s sovereign-debt crisis fails to damp domestic demand or prevent inflation from threatening to breach the central bank’s target.

The four-member policy board, led for the first time by new bank President Rodrigo Vergara, will keep the overnight rate at 5.25 percent for a sixth straight month, according to 16 of 20 economists surveyed by Bloomberg. The other four forecast a 0.25-point cut.

Europe’s debt crisis and six rate increases in the last 12 months have helped rein in growth and output in South America’s fifth-largest economy, which posted its slowest year-on-year expansion in 19 months in October. At the same time, rising inflation, retail sales and employment give little leeway to ease monetary policy, economist Jorge Selaive said.

“Activity is showing symptoms of fatigue, but on the other hand demand data still show significant and relevant consumer dynamics,” Selaive, chief economist at Banco de Credito & Inversiones, said by telephone yesterday from Santiago. “The labor market is very dynamic and we had an inflation surprise.”

After keeping the rate at 5.25 percent today, policy makers will cut borrowing costs to 5 percent in January and 4.5 percent by May, according to the median estimate of 62 economists surveyed Dec. 9 by the central bank.

Regional Response

The central bank raised borrowing costs by 2 full percentage points in the first half of 2011 before holding the rate in July. The bank last cut rates in July 2009 -- a year when Chile’s economy contracted for the first time since 1999.

Brazil, which is Latin America’s largest economy, reduced its key interest rate 50 basis points in each of its last three meetings to 11 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 unchanged for a seventh month and Colombia in November raised its benchmark rate for the first time since July on economic growth that could be the fastest in Latin America next year, according to the median estimate of 10 analysts surveyed by Bloomberg.

After posting 5.7 percent year-on-year growth in September, Chile’s economy expanded 3.4 percent in October, its slowest pace since the aftermath of the 8.8-magnitude earthquake in February 2010, while industrial production fell for the first time since April last year.

Output Gap, ‘Risks’

Economists in the central bank’s Dec. 9 poll cut their 2012 growth forecasts to 4.2 percent from 4.5 percent a month earlier.

“The reasons that up until now have justified maintaining the policy rate have been losing strength,” Cesar Guzman, an economist at Grupo Security, wrote in a report yesterday. “Outlooks for 2012 have been deteriorating.”

While a central bank survey published Dec. 7 show traders anticipate a quarter-point cut today, annual inflation accelerated for a fourth month to 3.9 percent in November, the highest rate in more than two years. The central bank targets 3 percent inflation, plus or minus 1 percentage point over two years.

Unemployment unexpectedly fell in the three months through October to 7.2 percent, while retail sales surged 8.6 percent in the 10th month of the year, the statistics institute said.

The peso weakened 0.1 percent to 515.20 per U.S. dollar at 10:26 a.m. Santiago time. Chile’s two-year interest-rate swap rose 1 basis point, or 0.01 percentage point, to 4.33 percent.

The peso has declined 7.8 percent in the past three months, the steepest drop against the dollar among the seven major Latin American currencies tracked by Bloomberg.

“The economy is at a level consistent with potential output so monetary policy should continue to be more or less in a neutral stance,” central bank Vice President Manuel Marfan said in a Dec. 5 interview from his offices in Santiago. “But there are risks, and it all depends on the size of the shocks.”

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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