Chile Keeps Key Rate at 5% as Economy Weathers Global Slowdown

Chile’s central bank kept borrowing costs unchanged for an eighth straight month yesterday as inflation eased below the Andean nation’s peers and growth accelerated.

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 threats on two fronts as China’s deceleration and Europe’s debt crisis threaten to damp demand for Chilean exports while internal growth is putting pressure on inflation. Policy makers yesterday maintained their neutral bias, giving no indication they will either raise rates to contain prices or cut them to sustain growth, Bice Inversiones’ Sebastian Senzacqua said.

“The probability of a cut obviously would increase if we saw something happen abroad that increases tensions and can be passed on to the local economy,” Senzacqua, an investment analyst at the financial services company, said yesterday by phone from Santiago. “Given that the economy is growing at trend, there is increasingly less need to raise the rate.”

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.

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

Inflation Pressures

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 eight basis points, or 0.08 percentage point, to 2.99 percent yesterday from Aug. 16 when the bank made its previous rate decision. Policy makers target 3 percent annual inflation, plus or minus 1 percentage point over 24 months.

“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.”

‘Flexibility to Wait’

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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