Chile Keeps 5% Rate as Spending Boom Offsets World Slowdown

Chile’s central bank kept its benchmark interest rate unchanged today for a 10th straight month as surging internal demand and a global economic slowdown leave little space to change monetary policy.

The bank board, led by bank President Rodrigo Vergara, held the key interest rate at 5 percent, as forecast by all 15 analysts surveyed by Bloomberg. Policy makers last changed borrowing costs in January with a quarter-point reduction that surprised economists.

Policy makers are weighing the threats posed by reduced demand for Chilean exports and an increase in spending at home that pushed retail sales up 8.4 percent in the first nine months. As a result, the next change in interest rates probably won’t come until early 2014, Felipe Jaque, an economist at BBVA Research, said by phone from Santiago yesterday.

“The deceleration of domestic activity has been slower than anticipated,” Jaque said. “While some of the surprises we’ve had with inflation may be transitory, some pressures may be incubating there in the medium term. And while we’ve had good news abroad with less turbulence and progress on solutions, risks remain.”

Economists surveyed this week by the central bank forecast rates would remain on hold for 23 months as inflation stays anchored around the central bank target of 3 percent.

One-Time Factors

Inflation has accelerated in the past three months, reaching 2.9 percent in October, beating the highest estimate made by analysts in a Bloomberg poll. Policy makers in a statement accompanying today’s decision attributed October inflation to one-time factors, adding that rates remain below 3 percent.

One-year breakeven inflation, which is derived from the difference between nominal and inflation-linked yields on swaps, increased 50 basis points, or 0.5 percentage point, to 2.65 percent yesterday from the end of last month.

Even as rates and expectations rise, Chile has the slowest inflation among major Latin American economies. And at 5 percent growth this year, Chile and Venezuela will boast the fastest economic expansion in the region behind Panama and Peru, according to analysts surveyed by Bloomberg.

Internal demand and investment are driving the gains. Retail sales growth in the first nine months of 2012 surpassed economic expansion of 5.4 percent in the period, according to calculations made by Bloomberg based on government and central bank data.

‘Above Projections’

“Domestically, output and demand indicators have evolved above projections,” according to today’s central bank statement. “The labor market remains tight.”

Unemployment declined to 6.5 percent in the third quarter from 7.4 percent in the year-ago period, while real wages increased 3.3 percent in September from last year.

“Consumption, investment, credit and employment are growing at high rates, as well as salaries, which have moderated a little bit in recent months,” central bank board member Joaquin Vial said in an interview last week. “Clearly, it’s all a little bit higher than what would be considered the optimal trajectory.”

Still, the economy is showing some signs of slowing as a global deceleration decreases demand for Chile exports.

Chile’s trade surplus narrowed by more than $6.4 billion to $2.9 billion in the first 10 months of 2012 from the year earlier on a 4 percent decline in exports and 6.4 percent gain in imports, according to central bank data.

The average price of copper, which accounts for more than half of Chile’s exports, is down 9.4 percent this year from 2011. Manufacturing output dropped 5.6 percent in September from 2011, the steepest decline since the aftermath of the 8.8-magnitude earthquake that struck south-central Chile in 2010.

“Political or economic events could result in the external economy being perceived as riskier,” according to minutes of last month’s meeting. The “domestic economy had decelerated, but not as sharply as previously expected. Neither of these two forces had taken precedence in the last months so as to trigger monetary policy changes or even a bias.”

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