Chile Probably Will Cut Key Rate as Economy Hits Four-Year Low

Chile’s central bank board probably will cut its key interest rate for the third time since October to stimulate the economy, bucking a tightening trend in emerging markets from India to Brazil.

Policy makers, led by bank President Rodrigo Vergara, will reduce the benchmark rate by 0.25 percentage point to 4.25 percent, according to 20 of 22 economists surveyed by Bloomberg. The other two forecast rates will remain unchanged at 4.5 percent for a third straight meeting. The decision is slated to be published after 6 p.m. local time.

With inflation running below its target for 20 months, Chile has the space to extend its cycle of monetary easing, while other emerging markets need to rein in consumer prices, Banco Itau Chile’s economist Rodrigo Aravena said. Traders polled by the central bank forecast inflation will slow further amid the weakest growth in four years.

“The bank started an easing cycle last year that hasn’t ended,” Aravena, chief economist at Banco Itau in Santiago, said by phone. “It will cut rates again during the second quarter as the economy continues to slow.”

One-year interest rate swaps declined 10 basis points, or 0.1 percentage point, this month to 4.08 percent yesterday. That implies policy makers will reduce rates to 4.25 percent today and trim it to 3.75 percent by November, according to Banco de Chile.

Brazil, India

Brazil has increased its benchmark Selic interest rate in seven straight meetings as policy makers in Latin America’s largest economy battle above-target inflation. India central bank Governor Raghuram Rajan said in a statement justifying last month’s increase in the repurchase rate that slower inflation eventually would help efforts to boost consumption and investment.

Brazil’s real, India’s rupee and Chile’s peso all depreciated in the past 12 months as traders speculated reduced monetary stimulus in the U.S. would prompt capital flight from emerging markets. A weaker currency may fan inflation by increasing the price of imports.

Chile’s peso fell 14 percent in the past year to 546.87 per U.S. dollar yesterday, the worst performance among major Latin American currencies after Argentina and Brazil.

“Chile can’t keep playing against the world current of monetary discipline,” Alfredo Coutino, director for Latin America at Moody’s Analytics, said by phone from West Chester, Pennsylvania. “The healthiest decision is to keep the rate on hold.”

Copper Producer

Economic growth and inflation in the world’s top copper producer slowed last year as investment and consumer demand started to ease. A lack of inflationary pressures are paving the way for further interest rate cuts, Vergara said in an interview Jan. 21.

Annual inflation eased to 2.84 percent in January, giving Chile the lowest rate among major Latin American economies tracked by Bloomberg after Colombia. The central bank targets 3 percent inflation, plus or minus one percentage point.

Traders polled every two weeks by the central bank forecast inflation will slow further to 2.8 percent in 12 months and that interest rates will fall to 4 percent by May, according to the survey published Feb. 12.

The Imacec index, a proxy for gross domestic product, rose 2.6 percent in December from the prior year, the slowest expansion since July 2011. GDP probably climbed 4.1 percent last year, the worst performance since the recession in 2009, Deputy Economy Minister Tomas Flores said in a Feb. 5 e-mailed statement.

The central bank is scheduled to publish fourth-quarter GDP data March 18.

“The quarter-point rate reduction is almost a fact,” Jorge Selaive, chief economist at Banco Bilbao Vizcaya Argentaria SA, said by phone from Santiago. “Activity has clearly not improved.”

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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