Chile Seen Keeping Rate on Hold as Opinions Split Over Next Move

Chile will leave its benchmark interest rate unchanged for a fifth straight month today as inflation slows, according to both traders and analysts -- a consensus that breaks down for policy decisions later this year.

Policy makers, led by bank President Rodrigo Vergara, will keep the key rate at 5 percent, according to all 16 economists surveyed by Bloomberg. The bank will announce its decision after 6:00 p.m. in Santiago.

Traders and investors polled by the central bank this week forecast a rate cut by December as Europe’s debt crisis deepens and as inflation eased for the third straight month in May. Economists in a separate bank poll published June 12 expected the next move to be a rate increase in 2013 following at least 11 months with no change after unemployment fell to the lowest in more than a decade.

“The base case scenario is that the central bank will wait to see how the European situation is going to evolve,” Diego Figueroa, an analyst at Larrain Vial SA, said by phone. “Economists’ estimates are more conservative and less volatile, while swaps are anticipating a rate cut soon.”

Chile’s six-month interest-rate swaps, which reflect traders’ views of average borrowing costs, fell to 4.84 percent yesterday from 5 percent on May 15, indicating that they are betting on a cut.

Inflation slowed to 3.1 percent in May from 3.5 percent the month before, while the economy expanded 5.6 percent in the first quarter from the year earlier.

Wait-and-See

Concern over the outcome of the European sovereign-debt crisis poses a risk to policy makers from Chile and other commodity-exporting nations in Latin America such as Brazil and Colombia, the World Bank said in its Global Economic Prospects report on June 12.

Brazil’s central bank has responded to slowing growth this year by cutting its key rate to a record-low 8.5 percent from last year’s high of 12.5 percent. Colombia has held borrowing costs at 5.25 percent for three months following nine increases since February 2011, while Chile raised rates five times last year before making a surprise reduction in January.

Chile’s policy makers are unlikely to change rates until it’s clearer what impact the world economic slowdown will have on the Andean nation, Santiago-based Celfin Capital SA said in a note e-mailed to investors yesterday.

“The worsening global outlook, some recent signs of moderation in local economic activity, and lower inflation figures and expectations have prompted a wait-and-see approach by the central bank,” it said. “These factors likely postponed the base rate increase envisioned in the last monetary policy report.”

Inflation Forecast

Policy makers in April forecast inflation would end the year at 3.5 percent. Since then, the pace of price increases has eased, declining in May to the lowest level since July last year. Inflation will slow further to 2.9 percent in a year, according to the median estimate of 58 traders and investors in the central bank’s June 13 survey.

Still, an unexpected improvement in the world economy would increase the threat of overheating in some commodity-based economies, the Washington-based World Bank said. Many policy makers in South America last year tried to contain inflationary pressures by raising interest rates.

“Policy tightening at that time was exacerbated by the slowdown in Europe,” the bank said. “There is a risk that the subsequent loosening of policies since then and perhaps in the future could combine with improved external conditions to provoke an overshooting in economic activity and inflation.”

Economic Growth

Chile’s first-quarter growth of 5.6 percent exceeded estimates made by policy makers in April. Unemployment slid to 6.5 percent in the three months through April from 7 percent the year earlier.

Expansion probably will decelerate as the economy climbs 4.7 percent this year before speeding up again to 5 percent in 2013, according to the median estimate of 60 economists in the June 12 central bank survey of economists.

“Chile’s economy has shown itself to be quite dynamic,” central bank board member Sebastian Claro said at a May 28 speech in Santiago. “The impact from the problems in Europe and the loss of vigor in some developing countries depends on elements outside our control and others that we can influence.”

To contact the reporters on this story: Randall Woods in Santiago at rwoods13@bloomberg.net; Sebastian Boyd in Santiago at sboyd9@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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