Chile Probably Will Hold Key Rate as Jobless Rate Tumbles

Chile’s central bank probably will keep the benchmark interest rate unchanged today after booming retail sales and a drop in the jobless rate reduced the scope for a repeat of last month’s unexpected rate cut.

Policy makers, led by central bank President Rodrigo Vergara, will keep the overnight rate at 5 percent, according to the median estimate of 20 analysts surveyed by Bloomberg. The bank will announce its decision after 6:00 p.m. local time.

Europe’s debt crisis and five interest rate increases last year haven’t caused economic growth to slow as quickly as policy makers forecast in December, maintaining the pressure on consumer prices. The central bank may have acted too soon in cutting rates last month and will temporarily stop its cycle of easing today, Alonso Cervera, an analyst at Credit Suisse Group AG in Mexico City, said by telephone.

“The deceleration hasn’t been that clear and inflation of late hasn’t been as low as the central bank expected, especially in December,” he said. “We do expect more reductions, but later in the year.”

After keeping the rate at 5 percent today, policy makers will cut borrowing costs to 4.75 percent by May and 4.5 percent by August, according to the median estimate of 56 traders and investors surveyed by the central bank on Feb. 7.

Latin American central banks have taken a mixed approach to accelerating inflation and prospects for slower growth abroad, with Brazil cutting rates, Mexico keeping them on hold and Colombia opting for an increase. Policy makers must be ready to act if the European crisis deteriorates, the International Monetary Fund said Feb. 2.

IMF Advice

“A weaker world economy and softer commodity prices translate into a gloomier outlook,” Nicolas Eyzaguirre, director of the Washington-based fund’s Western Hemisphere department, wrote in a blog on the IMF website. “Be ready to ease monetary policy, where strong institutions and low inflation would permit it.”

Chile’s inflation has exceeded the central bank’s target range of 2 percent to 4 percent in the past two months as economic growth surged from 4 percent in November to a higher-than-forecast 5.3 percent in the last month of the year.

Also in December, the unemployment rate unexpectedly fell half a point to 6.6 percent, the lowest level since before the 2009 recession. That, plus a surprise 10.1 percent surge in retail sales in December, increases the odds the government won’t implement a contingency plan to boost employment and investment in 2012.

Economic Growth

“The country truly is showing great capacity to grow,” acting Finance Minister Julio Dittborn told reporters in Valparaiso on Jan. 31. “Obviously, things could change.”

Chile’s gross domestic product probably increased 6.3 percent last year, exceeding the central bank’s December forecast of 6.2 percent, the minister said following publication of December growth data. GDP gains will slow this year, with the economy expanding between 3.75 percent and 4.75 percent, the central bank said in its quarterly monetary report on Dec. 20.

Meanwhile the global economy has shown signs of improving, with a decline in the U.S. unemployment rate. Greek lawmakers also have come closer to averting a default by approving austerity plans to secure rescue funds.

“More calm has been seen in markets, with a decline in risk premiums, a generalized appreciation of currencies against the U.S. dollar and an increase in the price of raw materials,” the central bank’s research department said in a report posted on the institution’s website yesterday.

Peso Appreciation

Policy makers may continue cutting rates to soften the peso, which has gained 7.8 percent against the U.S. dollar this year, Bret Rosen, a Latin America strategist at Standard Chartered Bank in New York, wrote in a Feb. 8 report. The peso fell 0.5 percent to 481.95 per U.S. dollar at 9:43 a.m. Santiago time.

The reasons behind the decision to cut rates last month haven’t changed, such as concerns that the external environment remains weak and inflation estimates haven’t breached the central bank target, Rosen wrote.

Two-year breakeven inflation, which is derived by the difference between nominal and inflation-indexed yields, was 3.09 percent at 9:05 a.m. Policy makers target 3 percent inflation over a two-year horizon, plus or minus 1 percentage point.

“The monetary authority has emphasized the forward-looking nature of its decision-making process,” Rosen wrote in the report e-mailed to investors. “Staying on hold risks sending a confusing message to the market, while supporting inflows to the Chilean peso, which faces substantial appreciation pressures.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE