Chile Probably Will Delay Rate Cuts After Growth Forecasts Rise

Chile’s central bank probably will keep its key interest rate unchanged for the eighth month in a row today after the government, policy makers and economists raised growth forecasts for the world’s top copper producer.

Policy makers, led by central bank President Rodrigo Vergara, will keep the benchmark rate at 5 percent, according to all 19 analysts surveyed by Bloomberg. The bank will announce its decision after 6:00 p.m. local time.

As Chile’s economy shrugs off the global slowdown, the lowest inflation rate in Latin America probably won’t be enough to trigger rate cuts. Policy makers are unlikely to start stimulating the economy until the world economic situation deteriorates further and starts putting a drag on Chilean growth, said Felipe Jaque, a former economist at the central bank.

“The external scenario probably would be the main factor to trigger a change in policy,” Jaque, now an economist at Banco Bilbao Vizcaya Argentaria SA, said by phone from Santiago. “Inflation was only marginally below market estimates” in August and doesn’t justify a rate cut, he said.

Consumer prices rose 0.2 percent last month, compared with the 0.3 percent median estimate of analysts surveyed by Bloomberg. Prices remained unchanged in July and fell 0.3 percent in June, the National Statistics Institute said.

The annual inflation rate climbed to 2.6 percent in August from 2.5 percent the month before. That compares with 4.57 percent in Mexico, 3.53 percent in Peru and the central bank’s own target of 3 percent, plus or minus one percentage point.

Forecasts

The central bank forecasts inflation will end the year at 2.5 percent, down from 4.4 percent last December, according to its September monetary policy report.

“Medium-term inflationary risks are still present,” the bank wrote in the report. “The recent increase in the world prices of fuels and some foodstuffs could rapidly pass through to inflation, all the more so considering the current state of output gaps.”

Chile’s economy expanded 5.5 percent in the second quarter from last year, the fastest growth in a year. A 7.1 percent gain in internal demand and 8 percent increase in investment led growth in the period, according to the central bank.

Policy makers in their September report raised their gross domestic product growth forecast for this year to a range of 4.75 percent to 5.25 percent from their June estimate of 4 percent to 5 percent. Finance Minister Felipe Larrain said in a Sept. 11 interview in London that growth would be closer to 5 percent than the government’s official estimate of 4.7 percent.

Vulnerable

Economists surveyed by the central bank have also raised their 2012 growth forecasts for the past three months, pushing it to 5 percent in September.

With copper accounting for more than half of Chile’s exports, the country remains vulnerable to a deceleration in China. Growth in the world’s largest consumer of the metal faces “notable downward pressure,” Chinese President Hu Jintao said Sept. 8, one day before data showed August industrial output rising at the slowest pace in three years.

Copper prices have averaged $3.62 a pound so far this year compared with $4.01 in all of 2011.

Credit conditions also have become more restrictive in Chile, with tighter supply and weaker demand for most personal and corporate loans, the central bank said in a survey of lenders published July 11. Banco de Chile and Banco Santander Chile, the nation’s two largest banks by assets, both reported a decline in second-quarter profits from last year.

“We are concerned with what is happening with the world,” President Sebastian Pinera, an economist trained at Harvard University in Cambridge, Massachusetts, said in a Sept. 10 interview in Russia. “The Chilean economy is behaving in a very strong and sound way despite a very gloomy picture in the international economy.”

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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