Chile Keeps 5.25% Rate, Signaling Cut If World Economy Slips

Chile’s central bank kept its benchmark interest rate unchanged yesterday for the fourth straight month, while indicating it may reduce borrowing costs if the global economy deteriorates further.

The five-member board, led by bank President Jose De Gregorio, held the overnight rate at 5.25 percent, as forecast by all but three of 20 economists surveyed by Bloomberg. Two analysts estimated the bank would cut the rate to 5 percent and one forecast a half-point reduction.

Policy makers, who raised the key rate five times in the first half of the year, said growth is slowing more than expected as the global environment worsens. Economists have brought forward their forecast for a rate cut to December from early next year, according to a central bank survey published this week.

“If the risk scenario becomes concrete, we probably will see the central bank act, and we’ll probably see it act with strength,” said Jorge Selaive, chief economist at Banco de Credito e Inversiones.

One-year interest rate swaps, which reflect traders’ views of future borrowing costs, rose 17 basis point to 4.41 percent at 8:26 a.m. Santiago time from 4.24 percent yesterday.

Open Options

The decision to hold the rate keeps the bank’s options open while anchoring inflation to central bank targets, Banco Bilbao Vizcaya Argentaria SA economist Alejandro Puente said.

The central bank cited the “tight” labor market and inflation forecasts in line with the 3 percent target in its statement accompanying the rate decision.

“Future rate changes are going to depend on the impact of the international scenario and Chile’s inflation expectations,” Puente said Oct. 12. “Analysts were expecting this decision, which as a result won’t change the peso’s value.”

The peso declined 11 percent against the U.S. dollar last month, the second worst performance among major Latin American economies behind the Brazilian real, as copper prices slumped 25 percent. Copper accounts for more than half of Chile’s exports and about one-third of fiscal revenue.

“This central bank has never reduced the monetary policy rate in the face of a depreciation of this type and this strength,” Selaive said last week. “Cutting rates would feed inflationary pressures created by this change in the exchange rate.”

Inflation Rate

Inflation accelerated to 3.3 percent last month from 3.2 percent in August and 2.9 percent in July. The central bank estimates consumer prices will rise 3.3 percent in December from last year.

The peso, which gained 0.9 percent to 500.76 per U.S. dollar at 8:32 a.m. today, will trade at 500 in December, according to the median estimate of 58 economists in an Oct. 11 central bank survey.

The same survey showed economists expect policy makers to reduce borrowing costs to 5 percent in December and 4.75 percent by March after keeping them unchanged yesterday.

The central bank is ready to change its current monetary policy if the global economy deteriorates further, policy maker Rodrigo Vergara said in a Sept. 28 interview. The bank last reduced the key rate in July 2009 as the country suffered its worst recession in more than a decade.

Chile has since recovered and may grow as much as 6.75 percent this year, which would be its fastest expansion since 1996, according to central bank forecasts. Growth will slow in 2012, expanding 4.25 percent to 5.25 percent, according to policy makers.

Slowing Down

“Activity and demand data show signs of moderation,” the central bank said in the statement yesterday. “In the case of production, the deceleration is somewhat more pronounced than what was considered in the base scenario.”

Economic growth, as measured by the central bank’s Imacec index that acts as a proxy for gross domestic product, increased 4.6 percent in August and 4 percent in July after GDP surged 8.4 percent in the first half of 2011.

The world’s top copper producer is able to keep interest rates on hold because it is less exposed to a slowdown in the U.S. and Europe than other emerging countries, Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut, said by telephone.

Chile, whose biggest export market is China, depends more on Asia and domestic consumption for economic growth than on commercial and financial ties to the U.S. and Europe, he said.

China’s GDP will expand more than five times faster than the U.S. this year, according to analysts surveyed by Bloomberg. Chilean demand is showing signs of “major vigor” even as it moderates, the central bank research department said in an Oct. 12 report.

“At the moment, we’re very happy with monetary policy, but that’s something we will keep analyzing,” Vergara said from his offices in Santiago. “There’s a danger in reacting too fast, but there’s also a danger in reacting too slowly.”

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