Chile Keeps 5% Key Rate as Lagarde Talks of ‘Wow’ Economy

Chile’s central bank kept its benchmark interest rate on hold yesterday for the 11th straight month as the slowest inflation in Latin America failed to dispel concern that a booming economy may inflate prices.

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 will post some of the fastest economic growth in the Americas this year as consumer spending and investments offset weaker exports. While the euro area crisis and the so-called U.S. fiscal cliff pose threats to its growth, the nation boasts some of Latin America’s soundest fundamentals, International Monetary Fund Managing Director Christine Lagarde said.

“Chile’s numbers are fantastic,” Lagarde told students at the University of Chile in Santiago yesterday. “Many countries around the world would be envious of the numbers you’ve got: high growth, controlled inflation, very low unemployment, a low deficit getting lower and very low debt. Wow.”

Policy makers yesterday highlighted external risks while pointing out that domestic growth has exceeded their estimates. Changes in monetary policy will depend on the impact of economic conditions on inflationary perspectives, the central bank said in a statement accompanying the decision.

Beating Expectations

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

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, which 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 yesterday. “The labor market remains tight.”

Wages climbed 3.3 percent in October from last year, while the jobless rate fell to 6.6 percent in the three months through October from 7.2 percent a year earlier.

Export Threat

The central bank expects economic growth to slow next year as demand weakens for Chilean exports. The Andean nation posted a $1.8 billion trade deficit in the third quarter compared with a $312 million surplus in the year-ago period, according to central bank data.

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.

While economic growth is beating expectations, 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. The consumer price index dropped 0.5 percent in November from the previous month, according to the National Statistics Institute.

“The negative CPI variation of November obeyed one-time factors,” the central bank said yesterday. “Inflation expectations over the policy horizon remain aligned with the target.”

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 Dec. 11. Inflation will hit the target two years from now, according to the survey.

“The monetary policy rate may remain stable at 5 percent in coming months,” Sebastian Senzacqua, an economist at Bice Inversiones, said after yesterday’s decision. “The next change mainly will depend on the evolution of local activity in coming months and, more importantly, the evolution of inflation next year.”