Chile Holds Key Rate at 5% as Inflation Eases Amid Global Woes

Chile’s central bank kept its benchmark interest rate unchanged for a fifth consecutive month as inflation in the world’s top copper producer eased and unemployment continued to decline.

The policy board, led by bank President Rodrigo Vergara, held the key interest rate at 5 percent today, as forecast by all 16 analysts surveyed by Bloomberg.

Chile boasts the lowest inflation among Latin America’s major economies, even as its borrowing costs surpass those of Mexico and Peru. While those factors give policy makers space to cut interest rates, faster economic growth and the limited impact of the euro area’s debt crisis to date mean the central bank will wait before moving rates, economist Mario Arend said.

“Uncertainty over what’s happening in the euro zone will keep the central bank in a wait-and-see attitude,” Arend, chief economist at Santiago-based financial services company Celfin Capital SA, said by phone yesterday. “They’re going to keep a neutral bias.”

Vergara may give a clearer guide to monetary policy when he addresses the Senate Finance Committee on June 18 after the bank publishes a new report with fresh forecasts. Policy makers in their last report, published April 3, estimated that inflation would end the year at 3.5 percent and that interest rates would probably track market expectations.

Since then, annual inflation slowed to 3.1 percent in May and one-year interest rate swaps, which reflect traders’ views of average borrowing costs, dropped 71 basis points, or 0.71 percentage point, to 4.72 percent yesterday.

Analysts vs Traders

While traders are forecasting a rate reduction within 12 months, economists surveyed by the central bank estimate the bank’s next move will be an increase.

“There’s definitely a gap as the swaps market is showing lower rates than the economists’ survey,” Bret Rosen, a Latin America strategist at Standard Chartered Bank in New York, said by telephone. “Economists tend to complete their numbers with a timelag. We had a lower inflation print in May and the swaps market has reacted accordingly.”

Inflation may be slowing because of one-time factors such as lower oil prices and still poses a threat in the medium term, policy makers said in minutes of last month’s meeting. Noting a “tight” labor market and faster-than-forecast economic growth, central bank board members discussed raising interest rates before voting unanimously to keep them unchanged May 17.

Jobless Rate

The jobless rate unexpectedly fell to 6.5 percent in the three months through April from 7 percent in the same period last year, while the economy has expanded 5.4 percent in the first four months of 2012, according to calculations made by Bloomberg based on central bank data. Policy makers in April forecast gross domestic product would climb 4 percent to 5 percent this year.

Still, South America’s fifth-biggest economy is showing signs of moderation as growth eased to 5 percent in March and 4.8 percent in April -- the weakest expansion since November last year.

Chile in May posted the widest trade deficit since 2008 as exports dropped 12 percent from the previous year on lower copper prices. The metal, which accounts for more than half of the country’s exports, has averaged $3.7025 a pound this year, down from $4.0222 a pound in 2011.

“The Chilean economy is open and integrated, meaning it isn’t able to remain isolated from developments,” bank board member Sebastian Claro said in a May 28 speech in Santiago. “The central bank is monitoring developments closely.”

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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