Chile and Peru Keep Rates at 4% Amid Above-Target Inflation

Chile and Peru kept interest rates unchanged yesterday as the central banks in both countries contend with above-target inflation and slowing economic growth.

Chilean policy makers, led by bank President Rodrigo Vergara, held the benchmark rate at 4 percent, as forecast by 16 of 17 economists surveyed by Bloomberg. One analyst predicted a quarter-point cut. Peru’s policy makers, led by bank President Julio Velarde also kept rates steady at 4 percent, as forecast by all 12 economists surveyed by Bloomberg.

Chile grew at the slowest pace in four years in the first quarter while Peru grew at the second-slowest pace, as falling copper prices halted an investment boom in the mining industry. The weaker growth didn’t prevent inflation accelerating for each of the past seven months in Chile and for the four of the past five months in Peru. Chile last cut rates in March, while Peru last did it in November.

If Chile’s inflation this month “is between 0.1 percent and 0.2 percent, there would be a green light to resume rate cuts,” said Felipe Alarcon, chief economist at EuroAmerica in Santiago. “If it is above expectations again, there will be new postponements.” Peruvian policy makers said the current rate “is compatible with a projected convergence of inflation to the target range in 2014 and 2 percent in 2015.”

Inflation in Chile accelerated to 4.7 percent in May, exceeding analyst forecasts for the fourth consecutive month and the 2 percent and 4 percent target range for a second month.

Likely Scenario

The country’s economic slowdown should push up unemployment in the next few quarters, easing price pressure and helping inflation return to target range by year end, Vergara said June 4.

Inflation has accelerated from 1.5 percent in October of last year as a weaker peso pushes up import costs. The peso has declined 10.2 percent against the dollar in the past eight months, the worst performing major emerging market currency tracked by Bloomberg after the Argentine peso.

“The most likely scenario assumes that the rise in inflation — associated with the peso depreciation, among other factors — is a temporary development, which will be monitored with special attention,” policy makers said. “The Board will consider the possibility of making additional cuts.”

In the minutes of last month´s meeting some bankers highlighted that there may be more structural factors involved in the pick-up in inflation.

Inflation expectations remain anchored at 3 percent for a year ahead and most analysts expect two further rate cuts by the end of 2014, according to a survey of economists published by the central bank this week.

Slowing Down

“In order for the central bank to resume cuts there has to be a clear downward trend and inflation expectations need to remain well anchored,” Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut, said June 11.

Further rate reductions are possible, though not imminent, as economic growth slows, policy makers said in the minutes of May’s monetary policy meeting.

The Imacec index, a proxy for gross domestic product, rose 2.3 percent in April from the year earlier, the second-slowest pace since an earthquake devastated the center-south of the country in February 2010.

Retail sales rose 1.6 percent over the same period, the least since 2009, while manufacturing output slid 4.2 percent, the ninth contraction in the past year. The situation may have deteriorated further in May, when imports tumbled 17.6 percent from the year earlier, the biggest decline since 2009.

Vergara said last week it “shouldn´t be a surprise” if in the next quarterly monetary policy report on June 16, policy makers reduced the bank´s 3 percent to 4 percent growth forecast for this year.

Peru’s Response

Falling export revenue in the world’s third-largest copper producer led President Ollanta Humala to unveil legislation this week to reduce the financial burden on companies and accelerate public and private investment. The central bank said June 10 it will lower the reserve requirement ratio next month for the fifth time this year.

Indicators “show a temporary weakening in economic activity, with GDP growth rates below its potential, chiefly because reduced dynamism in investment and exports,” policy makers said, according to their statement posted on the central bank’s website. The board is ready “to consider additional easing measures if necessary” after it lowered reserve requirements from July, it said.

The World Bank cut its 2014 global growth forecast this week amid weaker outlooks for the U.S. and China, Peru’s top trading partners. The Washington-based lender projects a 4 percent expansion for Peru, compared with a January estimate of 5.5 percent.

The central bank sees Peru growing 5.5 percent in 2014. Finance Minister Miguel Castilla said June 10 the government may revise its 5.7 percent projection as growth has been weaker than expected. Annual inflation accelerated to 3.56 percent last month from 3.52 percent in April. The central bank targets inflation in a range of 1 percent to 3 percent.

Peru’s exports fell 15 percent in April from a year earlier to $2.7 billion, the lowest in almost four years, the central bank said June 6. Imports rose 1.6 percent.

To contact the reporters on this story: Javiera Quiroga in Santiago at jquiroga5@bloomberg.net; John Quigley in Lima at jquigley8@bloomberg.net

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Philip Sanders, Robert Jameson

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