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Chile Signals Crisis May Prompt Cut After Keeping 5.25% Rate

Chile’s central bank kept its benchmark interest rate unchanged for a sixth straight month yesterday, indicating it may reduce borrowing costs should signs become more apparent that the European debt crisis is damaging South America’s fifth-biggest economy.

The four-member policy board, led for the first time by new bank President Rodrigo Vergara, kept the overnight rate at 5.25 percent, matching the forecast of 16 of 20 analysts surveyed by Bloomberg. Four expected a quarter-point cut.

Banco Central de Chile probably will change the direction of monetary policy should the global economic slowdown undercut growth and damp inflation in Chile, the board said in a statement accompanying yesterday’s decision. Policy makers will provide more clues on future decisions when the bank publishes its quarterly gross domestic product forecasts next week, Banco Santander Chile’s economist Juan Pablo Castro said.

“We will see a downward correction of the external and internal outlook, forecasting a new path for monetary policy that clearly will have to be expansive,” Castro said in a telephone interview yesterday from Santiago after the decision. “We should expect the first reduction as soon as January, with that report clearly describing the drivers.”

Chile’s six-month interest-rate swap, which reflects traders’ views on average borrowing costs, rose 3 basis points, or 0.03 percentage point, to 4.62 percent at 10:41 a.m. Santiago time. Three-month swaps rose 4 basis points to 4.94 percent. Chile’s peso weakened 0.4 percent to 517.72 per U.S. dollar.

‘Adverse External Outlook’

Policy makers will lower the rate to 5 percent in their next meeting and 4.5 percent by May as economic growth slows from 6.2 percent this year to 4.2 percent in 2012, according to the median estimate of 61 economists in a Dec. 9 central bank poll.

The bank in its last quarterly report, published in September, estimated GDP would expand as much as 6.75 percent this year and 4.25 percent to 5.25 percent in 2012.

“In recent months, a more adverse external outlook has developed, which will probably have consequences for growth and inflation in Chile,” policy makers said in yesterday’s statement. Local financial market conditions have become “somewhat more restrictive” as international conditions “remain tight,” they wrote.

According to the Dec. 9 survey, annual inflation will slow by 1 percentage point by next November from 3.9 percent last month, which was the highest rate seen since April 2009. The central bank targets 3 percent inflation, plus or minus 1 percentage point over two years.

Inflation, Growth

“Stubbornly elevated” inflation supported expectations that the bank would keep its rate on hold this month, Florencia Vazquez, an economist at BNP Paribas, said in a Dec. 7 note e-mailed to investors.

“Headline inflation has been somewhat higher than expected because of the incidence of fuels and foodstuffs,” the central bank said yesterday. “Core inflation figures remain contained.”

After posting year-on-year growth of 5.7 percent in September, the economy eased to a weaker-than-forecast 3.4 percent expansion in October, the slowest pace since the aftermath of the February 2010 earthquake that caused $30 billion damage in the $203 billion economy.

“Economic activity has evolved somewhat below projections,” the central bank said yesterday. “Internal demand continues to be dynamic.”

Retail sales, which expanded 8.6 percent in October, offset a drop in industrial output while unemployment in the month unexpectedly fell to 7.2 percent from 7.4 percent in September.

‘No Evidence’

“There are signals that there is a deceleration, but we have no evidence that it has been stronger than what we were expecting,” Manuel Marfan, the central bank’s vice president, said in an interview last week. “The economy has all the signals that it is still in the neighborhood of full employment and potential output.”

Peru’s central bank last week also kept its benchmark rate unchanged after consumer prices climbed faster than estimated.

Elsewhere in the region, Colombia in November raised its benchmark rate for the first time since July on economic growth that could be the fastest in Latin America next year, according to the median estimate of 10 analysts surveyed by Bloomberg.

Brazil, which is Latin America’s largest economy, reduced its key interest rate 50 basis points at each of its last three meetings to 11 percent, citing a need to mitigate the impact of the global economic slowdown.

Chile’s peso has declined 7.4 percent against the U.S. dollar in the past three months, the second-worst performance among major Latin American currencies after Brazil’s real.

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