Chile Holds Key Rate at 5% as Economy Shrugs Off Europe Woes

Chile’s central bank kept its key interest rate unchanged for a fourth consecutive month as the euro area debt crisis shows little sign of hurting the labor market or slowing demand in the world’s top copper producer.

The policy board, led by bank President Rodrigo Vergara, held the overnight rate at 5 percent today, as forecast by all 17 analysts surveyed by Bloomberg.

Even with the third-highest borrowing costs among major rate-setting central banks in Latin America, Chile’s economy will grow faster than the regional average this year, according to the International Monetary Fund. That expansion is being driven by domestic demand, which threatens to further boost consumer prices, analyst Jorge Selaive said by phone.

“Domestically, economic activity grew faster in the first quarter than had been projected in the last Monetary Policy Report, although without deviating substantially from its trend growth rate,” the bank said in today’s statement. “Inflation expectations remain close to target over the projection horizon, while short‐run expectations have fallen due mostly to the reduction in international oil prices.”

Policy makers will increase borrowing costs within five months after keeping them unchanged at least through June, according to the median estimate of 59 economists surveyed by the central bank on May 9. They had forecast a rate cut this year as recently as February.

Inflation Outlook

Policy makers raised inflation and economic growth forecasts for 2012 in April, saying inflation will hover about the upper limit of their 2 percent to 4 percent target range for the first half of the year.

Inflation surpassed that limit in the three months through February before falling to 3.8 percent in March and 3.5 percent in April. The decline may be temporary as consumer price pressures persist, Vergara told an economic forum in Santiago on May 3.

“Short-term inflation risks have increased,” he said. “However, risks from the external scenario remain important and their fruition can cause significant effects in the Chilean economy.”

Some traders in Chile this week started betting on an interest rate cut as the price of copper fell to a four-month low in New York following news that talks to form a government in Greece collapsed. The metal accounts for more than half of the Andean nation’s exports.

Interest Rate Swaps

The one-year interest rate swap, which reflects traders’ views of average borrowing costs, closed below 5 percent on May 15 for the first time since early March and fell another 13 basis points to 4.86 percent yesterday.

“Our call is for a hike by year-end, but that will highly depend on the global backdrop,” Katia Diaz, Latin America economist at 4Cast Inc. in New York, said by telephone. “As things continue to worsen globally it’s just going to be more difficult to argue for that, so we’ll have to revisit that on data and as things outside Chile develop.”

The central bank tomorrow is scheduled to publish data for first quarter gross domestic product, which according to the bank’s Imacec index that serves as a proxy for GDP grew 5.6 percent from the year before. That would be the fastest expansion since second quarter 2011.

Retail sales expanded 9.5 percent in the first quarter, according to calculations made by Bloomberg based on government data, and unemployment fell to 6.6 percent in the three months through March from 7.3 percent a year earlier.

“The Chilean economy gained steam in the first quarter despite the weakness of the external demand,” Alfredo Coutino, Latin America director at Moody’s Analytics, said in a May 7 note e-mailed to investors. “The economy began the year with an expansion at rates above its own potential.”

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