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Chile Central Bank Lowers CPI Estimate and Sees Rates Steady

Chile’s central bank today indicated the benchmark interest rate will remain steady after policy makers reduced their inflation forecasts and raised economic growth estimates.

The central bank board lowered its 2013 inflation forecast to 2.9 percent from 3 percent, while changing its growth estimate to a range of 4.25 percent to 5.25 percent from 4 percent to 5 percent, according to the quarterly monetary policy report published today. They raised the 2012 growth forecast to 5.5 percent from a range of 4.75 percent to 5.25 percent.

The board, led by bank President Rodrigo Vergara, changed its 2013 inflation estimate after consumer prices fell 0.5 percent last month, the most since August 2009. While inflation has remained below the 3 percent target since June, policy makers have been unwilling to cut the 5 percent benchmark rate for the past 11 months as economic growth exceeds their estimates.

“In the base scenario, which today we consider most probable, the Chilean economy will once again grow at rates in accordance with its trend while inflation gradually will return to levels in line with the target,” Vergara said in prepared remarks to the Senate today. “The base scenario uses as a working supposition that the monetary policy rate will remain on a stable trajectory, as indicated in current surveys.”

Traders and investors polled by the central bank on Dec. 10 forecast borrowing costs will remain unchanged at 5 percent through the end of next year before rising to 5.25 percent by December 2014.

Beating Forecasts

Since quarterly estimates were last published in September, economic growth has exceeded estimates made by analysts for three straight months. Policy makers today changed their 2012 estimate for the growth in gross domestic product to 5.5 percent from a range of 4.75 percent to 5.25 percent in September.

The economy expanded 5.5 percent in the first three quarters from the same period last year, while unemployment fell to 6.6 percent in the three months through October from 7.2 percent in 2011.

The rapid expansion of home builders and mid-size banks may create “vulnerabilities,” the central bank said in its bi-annual financial stability report, also published today.

Home builders have taken on more debt, while mortgage lending for their clients has become less restrictive, trends that “must be followed carefully,” Vergara said. Home prices have risen an average of 5.7 percent above inflation since 2009, according to the report.

Mid-Sized Banks

Medium-size banks are growing faster than their larger counterparts and may become increasingly exposed to the threat of cyclical factors, especially as lenders run the risk of underestimating the threats posed by credit card debt, the central bank said.

Central bank board members forecast a current account deficit equivalent to 4.6 percent of GDP next year, compared with their 4.4 percent forecast published in September, as they expect copper prices to average $3.40 a pound, according to the quarterly report. Chile is the world’s largest copper producer.

Inflation slowed to 2.1 percent in November from 3.9 percent in the year-ago month. The central bank board targets 3 percent inflation plus or minus 1 percentage point over two years.

Policy makers, who last changed borrowing costs in January with a quarter-point cut, probably will start raising interest rates sooner than traders expect, Leonardo Suarez, research director at Larrain Vial SA, wrote in a Dec. 17 note e-mailed to investors.

“Internal demand still remains highly dynamic and the labor market is very tight,” Suarez wrote. “Given the vigor of internal demand, we estimate the balance of risks may change the central bank’s focus to the local scenario and cause it to raise the monetary policy rate in the first quarter of 2013.”

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