Chile Central Bank Considered Holding Rates at 5% in June

Chilean policy makers in June discussed keeping interest rates unchanged for the first time since January before voting unanimously to raise lending costs, according to the minutes of the meeting published today on the central bank website.

Chile’s central bank on June 14 raised rates by a quarter-point to 5.25 percent, matching the estimate of 16 of 19 economists surveyed by Bloomberg. Two analysts expected a fourth consecutive half-point increase and one forecast a pause.

Policy makers considered a pause and a quarter-point increase to be “completely plausible” options, according to the minutes. The central bank probably will continue to raise interest rates at a pace that will depend on internal and external economic conditions, according to today’s report.

“The balance of risks for inflation meant it was advisable to continue removing the monetary stimulus to bring it in line with ranges that historically had been considered neutral,” according to the minutes. “Future steps should be adjusted according to the economic response and projections.”

New Neutral

The central bank’s disclosure that it considered keeping rates unchanged at 5 percent strengthens perspectives that it could pause again this year, Matias Madrid, an economist at Banco Penta in Santiago, said via telephone today.

“There will be pauses,” he said. “In July they will increase by 25 basis points before keeping rates unchanged in August.”

Lending costs are approaching so-called neutral levels that would neither stimulate nor constrict economic growth and consumer prices, bank President Jose De Gregorio said in a paper published June 22 on the central bank website.

“The world is going through a period of low interest rates and it’s probable that in the short term the neutral interest rate could be somewhat below what previous estimates indicate,” he wrote.

Neutral rates used to be 5 percent to 6 percent before the U.S. held lending costs near zero percent, central bank board member Enrique Marshall said in a May 27 speech in Santiago.

Chile’s two-year interest rate swaps, which reflect traders’ views of future rate decisions, rose three basis points to 5.69 percent from yesterday.

Policy Balance

Commodity prices, which have remained “volatile,” and domestic economic growth could cause inflation rates to accelerate, according to the minutes. Signs of a slowdown in the international economic recovery so far have had a “limited” impact on the Chilean economy, according to the report.

“The national economy going forward should demonstrate a growth rate that is in line with its potential,” the central bank wrote. “The alternative hypothesis shouldn’t be ruled out that an increase in the vigor of demand could endure for longer, driven by traction in the labor market.”

Chile’s gross domestic product will expand as much as 7 percent this year, which would be its fastest pace of annual growth since 1996, according to central bank forecasts.

Annual inflation will quicken to 4 percent by December from 3.3 percent in May, the bank said in its quarterly monetary report, published on June 20. Policy makers target annual inflation of 3 percent, plus or minus 1 percentage point over a two-year horizon.

Chile’s growing labor market could exacerbate consumer price pressures in South America’s fifth-largest economy, the central bank said in the monetary policy report.

“One board member indicated that the decline in the unemployment rate, discounting the effects of seasonality, showed that it was increasingly probable that it was below the natural rate of unemployment,” according to the minutes.

Low Unemployment

Chile’s jobless rate in the three months through May was 7.2 percent, up from 7 percent through April and down from 7.3 percent through March, the National Statistics Institute said in a report today.

The median estimate of 14 economists surveyed by Bloomberg was for unemployment to rise to 7.1 percent through May.

The labor force grew by 0.2 percent to more than 8 million through May from the previous period through April as the economy created 1,670 new jobs, the institute said.

The farm and manufacturing industries shed 63,860 and 15,060 jobs respectively in the three months through May from the previous period through April. Construction companies hired 11,190 workers in the period and fisheries increased employment by 3,810 people, the institute said.

“The unemployment rate still is situated at levels that are quite low,” Cristobal Doberti, chief economist at Bice Inversiones in Santiago, said in an e-mailed note to investors today.

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