Chilean policy makers debated raising their benchmark interest rate by a quarter point to 5.25 percent last month before deciding to leave it unchanged because they didn’t want to surprise investors.
The five policy makers were unanimous in their decision to keep the benchmark rate at 5 percent on April 17, minutes of the meeting published today by the central bank showed. Eighteen of 19 analysts surveyed by Bloomberg had expected rates to be left on hold, while one forecast a quarter-point increase.
“That the monetary-policy rate was at a normal or neutral level allowed space for gathering data before beginning a new rate move,” one of the bankers said. “Any course of action other than holding would be a surprise and probably difficult for the market, which overwhelmingly expected a pause, to absorb.”
The central bank said in its monetary-policy report last month that it expected interest rates to rise in line with the expectations expressed by market yields. At the time, the market was pricing in a rate increase towards the end of this year. Yields have since fallen after data showed manufacturing slowed in March, and the swaps market is no longer pricing in a rate increase in 2012.
Setting the Stage
The minutes “set the stage for rate hikes later in the year,” Bret Rosen, a Latin American strategist at Standard Chartered Bank in New York, said in an e-mailed note.
After slower-than-forecast price rises in March, the central bank still sees a risk that rising fuel costs and higher inflation expectations may feed through into generalized price increases, the minutes showed.
“The risk of an acceleration of underlying inflation, as a result of the tight conditions in the labor market and use of installed capacity, still remained,” the bank said. “For the moment, those risks hadn’t materialized.”
Inflation will ease to 3.5 percent by December after exceeding the upper limit of the central bank’s 2 percent to 4 percent target range in three of the past four months, according to the bank’s forecasts.
Chile’s two-year breakeven inflation, which is derived from the difference between nominal and inflation-linked yields on interest-rate swaps, rose four basis points to 3.21 percent at 9:09 a.m. in Santiago. The rate is little changed from 3.22 percent on April 17, the day of the monetary policy meeting. The two-year interest-rate swap rose five basis points to 5.20 percent today, the biggest gain in two weeks.
While short-term inflation risks have risen in Chile, external risks remain significant, Vergara told an economic forum in Santiago today. The bank works under the “supposition” that borrowing costs will evolve in line with market forecasts, he said.
Chilean traders and investors surveyed by the bank on April 24 were split on whether policy makers would raise rates or keep them unchanged within six months. Rates will be 5.25 percent by May 2013 and 5.5 percent in the next year, according to the poll.
Demand in the world’s top copper producing nation has shown little sign of slowing after retail sales surged 9.5 percent in the first quarter from last year, according to calculations made by Bloomberg based on government data. The sustained “vigor” of internal demand poses a risk to consumer prices, bank board member Enrique Marshall said April 24.
“A rise in the monetary-policy rate would be a major surprise, which would communicate to the market an increased concern about the dynamism of activity and inflation risks, as well as the possibility of faster and bigger future rises,” policy makers said in the minutes. “That could have undesirable consequences on the yield curve.”