Chile Economic Surge in May Reduces Chances of Key Rate Cut

Chile’s economy expanded 5.3 percent in May from the year earlier, beating economist estimates and reducing the likelihood that policy makers will cut interest rates to stimulate growth in the Andean nation.

The median estimate of 14 analysts surveyed by Bloomberg was for the economy to climb 4.5 percent over the period. The economy, as measured by the Imacec index that is a proxy for gross domestic product, increased 0.4 percent in May from April on a seasonally-adjusted basis on gains in retail, services and manufacturing, the central bank said in a report today.

Growth has exceeded economist forecasts from Bloomberg surveys in two of the past three months as retail sales climb at more than twice the speed of manufacturing. The persistence of Chile’s internal demand at a time when Europe’s debt crisis threatens the world economy increases the odds policy makers will refrain from changing rates, economist Matias Madrid said.

“This complicates the outlook for cuts because internal demand remains strong and we have a current account deficit, meaning we can’t stimulate demand further,” Banco Penta’s Madrid said by telephone from Santiago. “The base scenario is they’ll maintain rates, and it’s much more likely they’d cut rates than raise them -- which is very, very unlikely.”

Policy makers have kept their benchmark lending rate at 5 percent since February following a surprise quarter-point reduction in January.

Analysts vs Traders

Traders and economists surveyed by the central bank disagree on the next move in interest rates. Economists in a June 11 poll estimate policy makers will raise rates within 17 months while traders and investors in a June 26 survey forecast a quarter-point cut by October 2012.

One-year interest rate swaps, which reflect traders’ views of average borrowing costs, fell 2 basis points, or 0.02 percentage point, to 4.72 percent at 12:03 p.m. local time.

Chile’s economic growth rate will moderate in the second and third quarters this year before expanding in the fourth on a possible recovery abroad and increased mining output at home, Madrid said. Chile is the world’s top producer of copper, whose price has increased 0.9 percent since the end of last year to $3.491 a pound at 11:52 a.m.

Chile’s economic growth will ease to 4.3 percent for all of 2012 after expanding 5.6 percent in the first quarter, while still exceeding the expansion in Latin America of 3.7 percent, according to forecasts made by the Washington-based International Monetary Fund in April.

Regional Peers

“Brazil practically has stopped growing and Argentina is slowing very strongly, so it’s positive that our country has a healthy economy that is able to resist,” President Sebastian Pinera, a Harvard University-trained economist, said in images transmitted live on state-owned television channel TVN today. “But nobody is bullet-proof.”

GDP in South America’s two largest economies, Brazil and Argentina, expanded 0.8 percent and 5.2 percent in the first quarter from last year respectively. The IMF forecasts Brazil’s economy will expand 3 percent this year and Argentina 4.2 percent.

Manufacturing in South America’s fifth-largest economy expanded 2.8 percent in May from the previous year, compared with the median economist estimate of 1.8 percent, while retail sales grew 5.6 percent, the National Statistics Institute said in a report published on June 29. Chile posted a current account deficit of $346 million in the first quarter.

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