Chile Keeps 5% Key Rate as Prices Ease Amid Surging Growth

Chile’s central bank kept its benchmark interest rate on hold today for the 11th straight monthly meeting as surging economic growth and easing inflation left little room for a change in monetary policy.

The monetary policy board, led by bank President Rodrigo Vergara, held the key interest rate at 5 percent, as forecast by all 24 analysts surveyed by Bloomberg. Policy makers last changed borrowing costs in January with a quarter-point reduction that surprised economists.

Chile boasts the slowest inflation of any major Latin America economy tracked by Bloomberg and one of the region’s fastest economic growth rates. Policy makers will keep interest rates unchanged as they weigh whether economic gains will put pressure on prices, Hugo Osorio, a strategic investment analyst at brokerage Cruz del Sur, said by phone from Santiago.

“There’s space for rates to remain stable all next year if inflation effectively remains under control,” he said before today’s decision. “But we don’t think that will be the case. We think inflation will accelerate.”

Changes in monetary policy will depend on the impact of economic conditions on inflationary perspectives, the central bank said in a statement accompanying today’s decision.

Swap Rates

One-year swap rates, which reflect traders’ views of borrowing costs, has increased 15 basis points, or 0.15 percentage point, to 5.17 percent since Nov. 13 when policy makers last met. That implies borrowing costs will increase to 5.25 percent within the year.

Inflation fell to 2.1 percent last month from 2.9 percent in October, surprising all 12 analysts surveyed by Bloomberg who forecast rates ranging from 2.3 percent to 2.7 percent. Inflation eased in November on a decline in utility and clothing prices, according to the National Statistics Institute.

Still, consumer prices pose a risk after economic growth exceeded central bank forecasts in the third quarter, policy makers said in the minutes of last month’s meeting.

Inflation will accelerate in 12 months to 2.9 percent while remaining below the central bank target of 3 percent, according to the median estimate of 59 traders polled by the central bank on Dec. 11. Inflation will hit the central bank target two years from now, according to the survey.

‘Relevant Risks’

“Recent data suggests that the probability of observing very low annual inflation for a prolonged period of time had fallen,” one policy maker said last month, according to the minutes. “The inflationary panorama continued to present relevant risks in the medium term, taking into account the fact that the economy had been growing above its trend.”

Gross domestic product rose 5.7 percent in the third quarter from last year, beating estimates made by analysts on a 13 percent surge in investment and 6.4 percent gain in private consumption. The economy measured by the central bank’s Imacec index that serves as a proxy for GDP surged 6.7 percent in October, the fastest pace this year.

“Activity and internal demand data evolved above expectations in the third quarter,” the central bank said today. “The labor market remains tight.”

Manufacturing increased 9.1 percent in October from the year earlier, compared with the 3 percent median estimate of 15 economists surveyed by Bloomberg. Wages climbed 3.3 percent over the same period, while the jobless rate fell to 6.6 percent in the three months through October from 7.2 percent the year earlier.

GDP will expand 5.5 percent in 2012 and 4.8 percent next year, beating the Latin American average by at least one percentage point in both occasions, the United Nations economic commission for the region said in forecasts published Dec. 11.

“Inflation is likely to accelerate next year as growth returns to an above-potential pace,” analysts at BNP Paribas including Florencia Vazquez wrote in a Dec. 10 note e-mailed to investors. “This is likely to trigger a gradual tightening cycle in 2013. We expect the policy rate to remain unchanged near term.”

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