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Chile Holds Key Rate at 5% as Growth Weathers World Slowdown

Chile’s central bank kept its benchmark interest rate unchanged for an eighth straight month today as the Andean nation posts Latin America’s slowest inflation and one of the region’s fastest growth rates.

The policy board, led by bank President Rodrigo Vergara, held the key rate at 5 percent, as forecast by all 19 analysts surveyed by Bloomberg. Policy makers last changed borrowing costs in January, surprising economists with a quarter-point reduction.

The central bank is facing conflicting pressures as China’s deceleration and Europe’s debt crisis threaten to weaken demand for Chilean exports while domestic growth is pushing up some components of the consumer price index. The dual risk of a global slowdown and inflationary pressures at home gives policy makers little space to change interest rates, economist Benjamin Sierra said.

“The central bank is in a stalemate as it waits to see what happens, with no rush to act,” Sierra, an economist with Scotiabank Chile, said yesterday by phone from Santiago. “But another month or two could bring with it data that allows the central bank to start moving.”

Traders and investors polled every two weeks by the central bank forecast on Aug. 22 a quarter-point cut in the key rate by March, before ruling out monetary easing for the next two years in a Sept. 12 survey. In the two weeks between the two surveys, the government and central bank raised economic growth estimates for 2012 while inflation accelerated.

Growth Forecasts

Policy makers in their September monetary policy report increased their growth forecast for this year to a range of 4.75 percent to 5.25 percent from their June estimate of 4 percent to 5 percent.

Finance Minister Felipe Larrain said in a Sept. 11 interview in London that growth would be closer to 5 percent than the government’s official estimate of 4.7 percent. The economy continues to create jobs, he said, citing a decline in the unemployment rate to 6.5 percent in the three months through July from 7.5 percent last year.

At an estimated 4.9 percent increase this year, Chile’s economic performance will surpass the Latin American average of 3.7 percent growth, according to forecasts by the United Nations’ economic unit for the region in June.

Labor Market

“Domestically, output and demand indicators have evolved around trend,” the central bank said in a statement accompanying today’s decision. “Although employment growth has moderated further and no acceleration of labor costs is observed, the labor market remains tight.”

Consumer prices in the Andean nation rose 0.2 percent last month, compared with the 0.3 percent median estimate of analysts surveyed by Bloomberg. Prices remained unchanged in July and fell 0.3 percent in June, the National Statistics Institute said in a Sept. 7 report.

Annual inflation accelerated to 2.6 percent in August from 2.5 percent in July, while a “roughly” 5 percent annual increase in the price of services points to mid-term risks of inflationary pressures, Vergara said Sept. 7.

Two-year breakeven inflation, which is derived from the difference between nominal and inflation-linked yields on swaps, rose seven basis points, or 0.07 percentage point, to 2.98 percent yesterday from Aug. 16 when the central bank made its last rate decision. Policy makers target 3 percent annual inflation, plus or minus 1 percentage point over 24 months.

Inflation Risks

“In the short term, inflation could be greater because of the recent increase in the price of oil and food abroad,” Vergara said. “Sustained or increased vigor in activity and internal demand could continue putting pressure on capacity gaps and cause inflationary pressures.”

Still, Chile has the lowest inflation of any major Latin American economy tracked by Bloomberg, followed by a 3.11 percent rate in Colombia and 3.53 percent in Peru. At the same time, Chile has the highest borrowing costs of any rate-setting central bank in the region behind Brazil, which has cut rates for nine straight meetings.

Colombia also has eased monetary policy, reducing rates below those in Chile as a slowdown in inflation provides space to stimulate growth. Policy makers in Chile have indicated they may not follow suit.

“The working supposition is that the monetary policy rate will remain at current levels in the short term,” Vergara said Sept. 7. “The monetary policy rate is within ranges considered to be neutral, which provides flexibility to wait.”

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