Chile Keeps 5 Percent Benchmark Rate as Economic Growth Proves Resilient

Chile’s central bank kept its benchmark interest rate unchanged as faster-than-expected growth at home and abroad persuaded policy makers to pause after last month’s surprise reduction in borrowing costs.

The policy board, led for the third time by bank President Rodrigo Vergara, held the overnight rate at 5 percent today, as forecast by 12 of 20 economists surveyed by Bloomberg. Eight had expected a second consecutive quarter-point cut.

Chile joins Mexico and Peru in delaying rate reductions until it becomes clearer the global economy is slowing and that it is damping domestic demand. Chile’s economic growth and retail sales surpassed analyst forecasts in December, while unemployment dropped to the lowest level since before the 2009 recession, pushing up inflation expectations.

“It would seem to us they’d take the more cautious approach of waiting and seeing before cutting rates further,” Katia Diaz, Latin America economist at 4Cast Inc., said by phone from New York yesterday. “The consumer disposition to purchase durables is strong, so it’s a matter of seeing whether this trend will hold.”

Policy makers surprised all but 4 of 20 economists surveyed by Bloomberg last month by cutting rates for the first time since July 2009.

“Economic activity and internal demand have evolved somewhat above what was projected,” the central bank said in a statement accompanying today’s decision. “The labor market remains tight.”

Global Scenario

Two-year breakeven inflation, which is derived from the difference between nominal and inflation-linked yields on interest-rate swaps, has increased 13 basis points, or 0.13 percentage point, to 3.01 percent since the central bank’s last meeting.

The central bank targets 3 percent inflation plus or minus one percentage point over a 24-month horizon. Annual inflation has exceeded the upper limit of the target for the past two months, reaching 4.2 percent in January.

The global economic scenario has also improved in recent weeks. The U.S. jobless rate fell more than forecast in January, while Greek lawmakers came closer to averting a default by approving austerity plans to secure rescue funds.

Advanced economies are growing “slowly” as the U.S. shows improved signs of vigor and doubts remain about Europe’s ability to resolve the debt crisis, policy makers said in today’s statement.

‘Wait-and-See’

“Given the sum of external and internal news, I’m expecting more of a wait-and-see policy from the central bank,” Juan Pablo Castro, an economist at Banco Santander Chile in Santiago, said by phone from Santiago yesterday. “A rate reduction could come in March or April, although we don’t expect more than two more reductions this year.”

Policy makers will lower the benchmark rate to 4.75 percent in March before cutting to 4.5 percent by the end of the year, according to the median estimate of 45 economists in a Feb. 9 central bank survey.

Economists in the same survey raised their forecast for growth in the first quarter of 2012 and the full year after growth accelerated to 5.3 percent in December from 4 percent the month before.

Retail revenue in Chile grew 11 percent in 2011 as sales of consumer durable goods expanded 6.2 percent, driving economic gains of 6.3 percent in the year -- the fastest growth since 1997.

“Chile’s economy expanded last year at an above-potential rate, staying in an overheating situation,” Alfredo Coutino, Latin America director at Moody’s Analytics, said in a Feb. 6 note to investors. “If policy makers do not fight the excess demand through more neutral or even restrictive policies, the economy will become a victim of the overheating.”

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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