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Chile Unexpectedly Cuts Key Rate for First Time in 21 Months

Chile’s central bank unexpectedly cut its key interest rate by a quarter point for the first time in 21 months as economic growth slowed and the inflation rate fell to the bottom of the target range.

Policy makers, led by bank president Rodrigo Vergara, reduced the benchmark rate to 4.75 percent today, as forecast by two of 19 economists surveyed by Bloomberg. The other 17 analysts expected the bank to keep the rate on hold.

Inflation eased to 2 percent in September, the slowest pace in Latin America after Ecuador, while economic growth has weakened for three consecutive quarters. The slowdown led the central bank to cut its 2013 growth forecast last month to a range of 4 percent to 4.5 percent from 4 percent to 5 percent. With Chile’s benchmark rate at least 10 times the level in the U.S. and at the European Central Bank, and demand growth set to slow, traders were expecting a rate cut by year end.

“It is easy to predict that next year we need to compensate decreased demand with a lower key rate,” said Gonzalo Sanhueza, one of five members of the Monetary Policy Group of economists that makes recommendations on the key rate.

Signs of slower growth led policy makers to debate a rate cut at each of the previous five meetings, according to the minutes of discussions. Minutes from today’s meeting will be published Nov. 5.

Traders in the swaps market expected the central bank to leave its benchmark rate on hold at 5 percent today and cut it to 4.5 percent by December, according to Banco de Chile (CHILE) research.

‘Disneyland’

The economy could grow as little as 3.5 percent in 2014 as the country emerges from the “Disneyland” of high copper prices and low global borrowing costs, according to former central bank head Vittorio Corbo.

“In the next few years, Chile will have to work hard in order to grow and even to maintain an expansion of 4.5 percent,” Corbo said in an interview on Oct. 4. “Everything points to one or two rate cuts in the next six to 12 months.”

Sanhueza estimates the benchmark rate will have to fall to 4 percent in 2014.

“The economy has slowed, growth between January and August has been less than 2 percent and all growth indicators in the margin are under 4 percent,” he said. “Economic growth is under the potential rate”.

Inflation slowed to the lower end of the 2 percent to 4 percent central bank target range last month from 2.2 percent in August. Price increases haven’t risen above the mid-point of the target range all year.

“Subdued inflation for so long is one of the reasons we have an easing bias,” central bank director Joaquin Vial said in an interview on Oct. 11. Still, “subdued inflation is transitory and should accelerate to the central bank’s 3 percent target.”

To contact the reporter on this story: Javiera Quiroga in Santiago at jquiroga5@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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