Chile Keeps 5% Rate as Andean Banks Enter Wait-and-See Mode

Chile’s central bank kept its benchmark interest rate unchanged yesterday for a third consecutive month with policy makers giving little indication of future changes after they raised their inflation forecast.

The policy board, led by bank President Rodrigo Vergara, held the overnight rate at 5 percent, as forecast by 19 of 20 economists surveyed by Bloomberg. One analyst forecast a quarter-point increase to 5.25 percent.

Chile is poised to join Andean peers Colombia and Peru in boasting above-average economic growth this year and below-average inflation compared with other South American nations, according to International Monetary Fund forecasts. Chile’s economic situation provides little motivation for the bank to change rates anytime soon, Banco Bilbao Vizcaya Argentaria SA economist Felipe Jaque said.

“Today’s statement maintained the neutral bias seen in recent months,” Jaque said by telephone from Santiago after yesterday’s decision. “For the rest of the year, we assume the rate will remain at 5 percent.”

One-year interest-rate swaps, which reflect traders’ views of average borrowing costs, fell to 5.21 percent at 9:25 a.m. Santiago time from 5.23 percent yesterday.

Chile has the third-highest borrowing costs among major rate-setting central banks in Latin America behind Brazil and Colombia after the economy expanded 6 percent last year and 6.1 percent in 2010 -- the fastest pace in more than a decade. Chile cut interest rates by a quarter-point in January.

‘Distant Possibility’

Investors and traders surveyed this month by the central bank expect Chile to tighten borrowing costs by October.

“We look for the Central Bank to stay on hold for the near term, with rate hikes a distinct possibility in the second half of the year,” Italo Lombardi, Latin America economist at Standard Chartered Bank, wrote in a note e-mailed to investors today. “The monetary authority may opt to distance itself from the January cut, and thus prefer for more time to pass before moving rates in the other direction.”

Chile’s gross domestic product will expand 4.3 percent this year, surpassing the South American average of 3.8 percent, the IMF said yesterday in its World Economic Outlook. The world’s leading copper producer grew 6.1 percent in February from the year-earlier period, up from 5.5 percent in January and down from 6.9 percent in December.

Andean peers Colombia and Peru also will beat the region’s average in 2012, climbing 4.7 percent and 5.5 percent respectively, according to the Washington-based lender.

Inflation Expectations

Chile’s central bank raised its 2012 inflation forecasts to 3.5 percent this month from 2.7 percent after consumer prices exceeded the upper limit of its 2 percent to 4 percent target range for three straight months, before easing to 3.8 percent in March.

“Inflation, with volatility, is in the upper level of the tolerance range, while core inflation measures are around 3 percent,” the central bank said in a statement accompanying yesterday’s decision. “Inflation expectations remain around the target in the projection horizon.”

Consumer prices will rise 3.8 percent in Chile this year, missing the South American average of 7.4 percent, according to the IMF. Prices in Colombia and Peru will increase 3.5 percent and 3.3 percent respectively, the fund said.

Colombia in February raised its key interest rate to 5.25 percent in a bid to stabilize the fastest economic growth since 2006 before keeping the rate unchanged in March, while Peru has kept borrowing costs unchanged at 4.25 percent for 11 months.

‘Demand’ Concern

The fund warned against monetary easing in a region where growth will exceed the global average and inflation still remains above the midpoint of target ranges.

“Policies must be alert to domestic overheating and must build on a strong foundation of prudential measures developed during the most recent periods of robust capital flows,” it said in the report.

Chile’s next interest rate move needs to be an increase as policy makers strive to contain growth and inflation, Alfredo Coutino, Latin America director at Moody’s Analytics, said in an April 5 note to investors.

“If policy makers do not act quickly, the economy will be fully immersed in the overheating territory,” Coutino wrote. “If monetary conditions remain in the expansionary zone for a more prolonged time, the excess demand will accommodate more in consumer prices and imports, thus deteriorating inflation prospects and the external balance.”

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