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

Chile’s central bank kept its benchmark interest rate unchanged for a sixth consecutive month after economic growth in the world’s top copper producer showed little sign of easing amid a global slowdown.

The policy board, led by bank President Rodrigo Vergara, held the key interest rate at 5 percent today, as forecast by all 16 analysts surveyed by Bloomberg. Policy makers last changed borrowing costs in January, surprising economists with a quarter-point reduction.

Among Latin America’s major economies, Chile boasts the lowest inflation even as it’s on track to grow faster than the regional average forecast by the United Nations. Policy makers will be reluctant to cut rates until Europe’s debt crisis and the deceleration of China’s expansion have a more pronounced impact on the Andean nation’s growth, said Felipe Jaque, the lead economist at BBVA Research Chile.

“In light of what’s happening with the global and domestic economies, the wait-and-see approach is much more appropriate than anything else,” Jaque said by telephone from Santiago yesterday. “The central bank discussion will be similar to the June meeting, where policy makers only considered holding rates.”

Policy makers will keep rates unchanged for at least 23 months as inflation remains at or below the central bank target of 3 percent through December next year, according to the median estimate of 58 economists surveyed by the bank on July 9. Traders and investors polled by the central bank a day later forecast the first cut in borrowing costs by October 2012.

Trend, Moderation

The country’s gross domestic product expanded 5.6 percent in the first quarter from last year, the fastest growth since the three months through June 2011.

Since the first quarter, the economy grew 4.8 percent in April and 5.3 percent in May, exceeding the highest estimate among the 14 analysts surveyed by Bloomberg.

“Domestically, output and demand indicators, despite decelerating less than expected, are evolving at trend rates,” the central bank said in a statement accompanying today’s decision. “The labor market remains tight, although some moderation is observed in the pace of employment growth.”

‘Complex Moment’

Chile’s GDP will expand 4.9 percent in 2012 from last year, surpassing the Latin American average of 3.7 percent, the United Nations’ economic unit for the region said in a report last month.

Brazil and Mexico, Latin America’s two biggest economies respectively, will expand 2.7 percent and 4 percent, it said.

Still, Chile’s economy is showing signs of slowing as demand for its exports weakens during the European sovereign-debt crisis and China’s economic moderation.

“We’re going to see a deceleration in coming months,” Finance Minister Felipe Larrain, a non-voting participant of central bank rate decision meetings, said July 5 in a statement on the ministry website. “Despite being well prepared, our country is immersed in a world that is going through a complex moment.”

Chile in May posted its first trade deficit in nine months as the price of its leading export, copper, declined, while retail sales in May grew at the slowest rate since 2009. The unemployment rate rose to 6.7 percent in the three months through May from 6.5 percent in the previous month.


Credit conditions have become generally more restrictive, with tighter supply and weaker demand for most corporate and personal loans, the central bank said in a quarterly survey posted on its website yesterday.

The government this week reduced its 2012 inflation and copper price estimates on falling commodity values. Inflation will end 2012 at 2.7 percent, rather than 2.9 percent as forecast in October, and the metal’s price will average $3.55 a pound, down from $3.70 a pound as previously estimated.

Inflation rates have fallen in the past four months to 2.7 percent in June, the lowest level since January 2011.

“In recent months, the most volatile components of the basket (i.e., energy and foodstuffs) show a negative incidence on the CPI, contrasting with their behavior of the first quarter,” according to today’s statement. “Medium-term inflation expectations remain around the target.”

Chile’s economic growth, and the risk of higher international prices, still pose a threat to consumer prices in the medium term, Vergara said this week in a presentation posted on the bank website.

“You have to be vigilant,” he said.

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