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Chile Keeps 5% Rate as Economic Leap Kills Need for Stimulus

March 15 (Bloomberg) -- Chile’s central bank kept its benchmark interest rate unchanged for a second month as faster-than-expected inflation and growth reduced the need for policy makers to stimulate the economy.

The policy board, led by bank President Rodrigo Vergara, held the overnight rate at 5 percent today, as forecast by all 17 economists surveyed by Bloomberg. The board cut borrowing costs in January and discussed doing the same last month before voting unanimously to keep rates unchanged, minutes of that meeting show.

The third-highest borrowing costs among major rate-setting central banks in Latin America haven’t prevented inflation from breaching Chile’s target range for the past three months. The surge in prices, plus a pick-up in economic growth since December, makes a second rate cut this year unlikely, said Alfredo Coutino, Latin America director at Moody’s Analytics.

“The Chilean economic reality is showing the rate cut in January was a mistake,” Coutino said by phone yesterday. “The central bank cannot ignore that the Chilean economy is in an overheating situation.”

The world’s leading copper producer grew 5.3 percent in December from the previous year, bringing growth for the full year to 6.3 percent -- the fastest pace since 1997. The economy expanded 5.5 percent in January, exceeding the estimate of all 12 analysts surveyed by Bloomberg.

Beating Forecasts

“Economic activity and internal demand have evolved above what was projected,” policy makers said in a statement accompanying today’s decision. “Future changes in the monetary policy rate will depend on the implications of domestic and external macroeconomic conditions on the inflationary outlooks.”

Economists surveyed this month by the central bank increased their 2012 economic expansion estimate to 4.4 percent from 4.1 percent in February and 4 percent in January.

“Clearly there has been a very, very significant change in people’s forecasts,” Alejandro Puente, an economist at Banco Bilbao Vizcaya Argentaria SA in Santiago, said yesterday by phone. “A lot of people changed their outlook not just for this month’s meeting, but for future ones as well.”

Traders and investors surveyed by the central bank on March 13 forecast rates will remain unchanged for six months, before rising to 5.25 percent by March 2013. They had forecast a rate cut by June in the Feb. 21 poll. A separate survey of economists this week forecast no change in rates in 2012.

Interest-Rate Swaps

One-year interest rate swaps, which reflect traders’ views of average borrowing costs, rose to 5.26 percent today from 4.68 percent on Feb. 14 when policy makers previously met.

The central bank conducted the surveys of traders, investors and analysts after data showed inflation reached a higher-than-forecast 4.4 percent in February, exceeding the upper limit of the bank’s 2 percent to 4 percent target range for the third straight month. Unemployment in January was a lower-than-forecast 6.6 percent and wages in the month surged 6.7 percent from the year earlier.

“We’re using all our strength and are doing all the work needed in coordination with the central bank to see how we can collaborate to contain price increases,” Finance Minister Felipe Larrain told reporters yesterday in Santiago. “This is an issue that will be discussed and undoubtedly among other issues will influence the decisions the central bank makes.”

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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