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Chile Seen Leaving Rates on Hold as Global Woes Threaten Growth

Chile’s central bank will leave its benchmark interest rate unchanged for a fourth straight month today as Europe’s debt crisis deepens, dimming growth prospects in the world’s top copper producer, a survey showed.

Policy makers, led by bank President Rodrigo Vergara, will keep the overnight rate at 5 percent, according to all 17 economists surveyed by Bloomberg. The bank will announce its decision after 6:00 p.m. local time.

Two consecutive declines in the inflation rate have taken pressure off the central bank to raise rates soon after economic growth accelerated in the first quarter. With copper prices falling to a four-month low this week as Greece failed to form a new government, undermining the euro, rates are likely to be left on hold for some time, Latin America economist Katia Diaz said.

“The fact that inflation continues to decline because of lower commodity prices and a stronger peso, together with a deteriorating external scenario, means that Chile’s central bank will have a difficult time justifying a hike,” 4Cast Inc.’s Diaz said by phone from New York. “Rates will remain stable at least in the coming months.”

The central bank will keep rates on hold through August before increasing them to 5.25 percent by November and 5.5 percent by May 2014, according to the median estimate of 58 traders and investors polled by the bank on May 8.

Risks Remain

Policy makers at last month’s meeting discussed raising rates by a quarter-point before voting unanimously for a hold, saying they didn’t want to surprise investors who forecast a pause and that consumer-price pressures still existed.

“The risk of an acceleration of underlying inflation, as a result of the tight conditions in the labor market and use of installed capacity, still remained,” the bank said in the minutes. “For the moment, those risks haven’t materialized.”

Inflation has declined in the past two months, reaching 3.5 percent in April, after exceeding the upper limit of the central bank’s target range in the three months through February. Gasoline prices have slipped in the last two weeks while food and beverage prices contracted in April from the previous month.

Policy makers target 3 percent inflation, plus or minus 1 percentage point over two years.

In Latin America, only Mexico and Colombia have lower inflation than Chile. Those two countries kept borrowing costs unchanged in their latest monetary policy meetings, with Mexican central bankers signaling a willingness to cut as inflation continues to ease.

Traders’ Bets

As Europe’s debt crisis worsens, some traders in Chile have even started betting on a rate cut. The two-year interest rate swap, which reflects traders’ views of average borrowing costs, closed below 5 percent on May 15 for the first time since February.

“It’s pricing in a cut,” Sebastian Ide, head of rates trading at Banco de Chile in Santiago, said May 15. “The external situation is very bad, but the local situation is so good that we’re not close to a rate cut yet. If the next local data come out positive, this will revert.”

Chile’s central bank tomorrow is scheduled to publish data on first-quarter gross domestic product. The bank’s Imacec index, which serves as a proxy for GDP, expanded 5.6 percent from the previous year. That would be the biggest gain since the second quarter of 2011.

That growth will ease, with GDP expanding 4.8 percent in the second quarter from last year and 4.8 percent for all of 2012, according to the median estimate of 60 economists surveyed by the central bank on May 9.

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