Chile Central Bank Sees Rates Stable as CPI Risks Persist

Chile’s central bank indicated the benchmark interest rate will remain unchanged in the “short term” as faster-than-forecast growth in the first part of the year maintains pressure on inflation.

Policy makers, led by bank President Rodrigo Vergara, estimate inflation will end the year at 2.7 percent before accelerating to 3 percent in 2013, according to the quarterly monetary policy report released today. In April, the bank estimated inflation would reach 3.5 percent this year. Policy makers today didn´t change their 2012 economic growth forecast of 4 percent to 5 percent.

Vergara has seen breakeven rates tumble in the past three months as inflation slows, indicating that traders expect price- growth to continue easing, even as economic expansion remains in excess of 4.5 percent. Slowing inflation led traders surveyed by the bank last week to bet on a second interest rate cut this year, while economists polled separately expect the next move to be an increase.

“In the forecast we use as a working supposition, in the short term, the monetary policy rate will remain stable,” Vergara said in prepared remarks distributed to reporters. “There is a contrast between the weakened external outlook with the performance of activity and internal demand in Chile.”

Policy makers have kept rates unchanged at 5 percent for the past five monthly meetings following a surprise quarter- point reduction in January.

Rate Forecast

One-year interest rate swaps, which reflect traders’ views of average borrowing costs, declined 68 basis points, or 0.68 percentage point, to 4.75 percent on June 15 from April 3. One- year breakevens, which are derived from the difference between nominal and inflation-linked yields on swaps, fell 65 basis points to 2.71 percent over that same period.

Chile’s central bank targets 3 percent inflation, plus or minus 1 percentage point over two years. Inflation slowed to 3.5 percent in April and 3.1 in May as the most volatile components of the price-basket declined in price, the central bank said in a statement accompanying its June 14 rate decision.

“Inflation has proved less persistent than feared,” Cristobal Doberti, chief economist at Bice Inversiones, wrote in a note e-mailed to investors June 15. “Although our projections continue to indicate that activity will decelerate toward the middle of this year, everything indicates that the deceleration will be quite a bit more contained than initially thought.”

Limited Impact

The European sovereign-debt crisis so far has had a “limited” impact on Chile´s financial markets, while reducing demand for the Andean country´s exports, according to today’s report. External financing conditions have become “somewhat” more restrictive for Chile, the bank said in a separate paper on the country´s financial stability.

The bank estimated that the price of copper, which accounts for more than half of Chile´s exports, will average $3.55 a pound this year and $3.40 in 2013. Prices already have dropped below the April forecast of $3.70 a pound.

GDP expanded 5.6 percent in the first quarter -- the fastest growth since the three months through June 2011 -- and will expand 4.8 percent in the second, according to the median estimate of 60 economists surveyed by the bank on June 11.

“The medium-term risks for inflation remain in effect,” according to the report. “The growth rate of activity and internal demand has eased, but at a slower rate than was expected.”

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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