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Chile Keeps Rate on Hold as Economy Resists Europe Contagion

Chile’s central bank kept its key interest rate unchanged for a fourth consecutive month as surging domestic demand and a deterioration in the global economy leave little scope to change monetary policy.

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

Growth in the world’s leading copper producer has exceeded central bank estimates this year even as the European sovereign-debt crisis deepens. Policy makers probably will keep the key rate unchanged until threats of contagion from Europe subside, Sebastian Senzacqua, an economist at Bice Inversiones in Santiago, said after yesterday’s decision.

“The central bank for now probably will be paying attention to events in the euro area before it takes a more decisive decision,” Senzacqua said by telephone. “Obviously the central bank’s long-term position will be that the monetary policy rate could undergo some increases.”

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 on expectations growth would slow.

Inflation Outlook

The central bank raised inflation and economic growth forecasts for 2012 in its latest monetary policy report, saying inflation will stay about the upper limit of the 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 following news that talks to form a government in Greece collapsed. The metal, which accounts for more than half of the Andean nation’s exports, is down 8.8 percent in May and is heading for the biggest monthly drop since September.

Asian Economy

“Chile is almost like an Asian economy in Latin America and is one of the economies that becomes more reactive to what happens abroad,” Pablo Goldberg, head of emerging-market research at HSBC Holdings Plc in New York, said in an interview with Bloomberg Radio’s Bloomberg Surveillance. “Inflation is very linked to commodity prices and commodity prices have been coming down. And also they’re very open to global trade.”

Chile’s 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 15 basis points to 4.84 percent two days later. Rates were down to 4.79 percent at 10:37 a.m. Santiago time today.

“We expect the central bank to remain on hold for the foreseeable future,” Alberto Ramos, a senior Latin American economist at Goldman Sachs & Co., said in an e-mailed note to clients yesterday. “However, if the global macro backdrop continues to deteriorate and copper prices decline further, the monetary policy council may soon adopt an easing bias.”

Gross domestic product expanded 5.6 percent in the first quarter from last year, the fastest growth since the three months through June last year, the central bank said in a report posted on its website today.

“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 central bank said in a statement accompanying yesterday’s decision. “The labor market remains tight.”

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.

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