Chile Central Bank Delays Key Rate Cuts as Growth Defies Need for Stimulus
Chile’s central bank kept its benchmark interest rate unchanged yesterday as faster-than- expected growth at home and abroad persuaded policy makers not to repeat last month’s surprise reduction.
The policy board, led for the third time by bank President Rodrigo Vergara, held the overnight rate at 5 percent yesterday, as forecast by 12 of 20 economists surveyed by Bloomberg. Eight had expected a second consecutive quarter-point cut.
Chile rejoined Mexico and Peru in delaying rate cuts until it becomes clearer the weak global economy is damping domestic demand. Chile’s economic expansion surpassed analyst forecasts in December, reducing the urgency to stimulate growth in the world’s top copper producer, Cristobal Doberti, an economist at Bice Inversiones in Santiago, said by phone yesterday.
“We have an external situation that in terms of economic data is doing better than we had previously seen along with reduced tension in financial markets and a local economy that is evolving faster than expected,” he said. “That being said, the economy still will decelerate in the first half.”
That slowdown will motivate policy makers to reduce borrowing costs to 4.5 percent in the current easing cycle, he said.
Chile’s six-month interest rate swap, which reflects traders’ views of average borrowing costs, rose 7 basis points, or 0.07 percentage point, to 4.76 percent at 9:07 a.m. Santiago time from yesterday.
Outperforming
The economy expanded an estimated 6.3 percent last year, surpassing the 6.2 percent forecast made by policy makers in December, economists at the central bank wrote in a Feb. 13 report. Growth will slow to between 3.75 percent and 4.75 percent this year, according to policy makers.
“Economic activity and domestic demand have tended to outperform forecasts,” the central bank said in a statement accompanying yesterday’s decision. “Any future changes in the monetary policy rate will depend on the implications of domestic and external macroeconomic conditions on the inflationary outlook.”
Two-year breakeven inflation, which is derived from the difference between nominal and inflation-linked yields on interest-rate swaps, increased 19 basis points to 3.06 percent at 9:33 a.m. today from Jan. 12, when the central bank cut rates.
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.
Global Scenario
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 yesterday’s statement.
“The central bank is still ahead of the curve and the rate cut in January signaled the predisposition to act by adding monetary support to the economy,” Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York, wrote in a note e- mailed to investors yesterday. “There is still a fair probability that we will see additional rate cuts.”
Yesterday’s decision risks putting more pressure on the Andean country’s exchange rate, Italo Lombardi, an economist at Standard Chartered Bank in New York, wrote. The peso has gained 4.7 percent against the dollar in the past month, the strongest performance among the seven major Latin American currencies tracked by Bloomberg behind Mexico.
“The Chilean central bank’s decision risks sending a confusing message to the market, while supporting inflows to the Chilean peso, which has faced substantial appreciation pressures,” he wrote in a note e-mailed to investors.
Chile’s peso strengthened 0.7 percent to 481.34 per U.S. dollar at 9:29 a.m.
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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