Nov. 30 (Bloomberg) -- Chilean unemployment unexpectedly fell in the three months through October, while minutes from the central bank’s last meeting show policy makers held off from a rate cut because the domestic economy remains strong.
The central bank, which has kept the key rate at 5.25 percent in their past five monthly meetings, said reducing borrowing costs would have been a “preventative” step as the global economy slows, according to the minutes posted today on the bank website.
Policy makers voted to hold the rate after inflation accelerated to 3.7 percent in October, its fastest pace since April 2009, and the economy grew 5.7 percent in September from the year earlier, the minutes showed. Still, the European debt crisis may be beginning to affect the domestic economy, with industrial production contracting in October for the first time since the aftermath of a devastating earthquake in February 2010, the statistics agency said yesterday.
Interest rates will probably fall “in coming months, but there wasn’t, for now, sufficient justification for it,” one of the central bank policy makers said according to the minutes. “Given surprises in inflation and activity, such a decision would be hard to explain.”
One of the bankers said that, were the crisis in Europe to spread to financial markets, the bank could act as it did after Lehman Brothers Holdings Inc.’s bankruptcy, when it slashed its benchmark rate by 7.75 percentage points to 0.5 percent, offered cheap loans to banks and cut bond sales to pull yields down.
When, Not If
“There are more and more reasons to think the bank will lower rates,” said Rodrigo Aravena, chief economist at Banchile Inversiones in Santiago. “The question now is how much to lower the rate by, not whether to.”
The bank will probably hold in December and then start cutting rates in January or February, he said.
Given a choice between acting too soon and regretting it or maintaining the rate for too long, the latter was the less bad option, one of the policy makers said.
“A cut in the context of muddling through could be counterproductive with regards to management of expectations, the economic cycle and, finally, for achieving the inflation target,” the same banker said, according to the minutes. “In addition recent surprises in activity and internal inflation also indicated being prudent.”
Room to Cut
At 5.25 percent, Chile has the second-highest borrowing costs behind Brazil among major Latin American countries that set interest rates.
South America’s fifth-largest economy has space to change monetary policy if the global decline slows growth in Chile, central bank President Jose De Gregorio said Nov. 22.
“No matter what scenario we face, the Chilean economy -- and monetary policy in particular -- has the tools, the flexibility and the willingness needed to reduce the costs of a deteriorated external environment,” he said on Nov. 22.
Gross domestic product will expand as much as 6.75 percent this year, which would be the fastest expansion in more than a decade, and 4.25 percent to 5.25 percent in 2012, according to central bank forecasts published in September.
Policy makers may need to revise estimates in light of the global slowdown, De Gregorio said in an interview with Chilean newspaper El Mercurio this weekend.
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