Chile’s central bank kept borrowing costs unchanged for the second straight month as the inflation rate reached a five-year high and economic growth a near five-year low.
Policy makers, led by bank President Rodrigo Vergara, held the key rate at 4 percent yesterday, as forecast by 20 of 23 economists surveyed by Bloomberg. Three analysts had predicted a quarter-point reduction.
In a statement accompanying the decision, the bank said it would consider adding to four rate cuts in the past seven months, even after inflation accelerated to 4.3 percent in April, above the 2 percent to 4 percent target range for the first time since February 2012. The pick-up in inflation was probably transitory as it was linked to the decline in the peso, among other factors, the bank said.
“The economy will need additional easing, but a reduction isn’t imminent,” said Cesar Guzman, an economist at Banco Security in Santiago. “It is clear that the bank is worried about the inflation pick-up being a bit more permanent than transitory.”
Inflation has exceeded analyst expectations in each of the past three months, even as a slump in investment undermines economic growth and pushes up unemployment.
Core prices, which exclude fuel and food, leaped 4.3 percent in April from the year earlier, the fastest pace in five years. Prices were driven by education and health-care costs, making it harder to blame the increase only on the recent decline in the peso.
“The most likely scenario assumes that the rise in inflation -- associated with the peso depreciation, among other factors -- is a temporary development,” the bank said yesterday. “The board will consider the possibility of making additional cuts.”
The peso has weakened 5.9 percent against the dollar in the past six months, the worst performing emerging market currency after the Argentine peso and Russian ruble, pushing up import costs.
Inflation expectations for this year have risen to 3.7 percent from 3.3 percent last month, according to a survey of economists released by the central bank May 12. The central bank had forecast inflation of 3 percent in their quarterly monetary policy report in March.
The bank said at the time that its base scenario sees the inflation rate rising to between 3.5 percent and 4 percent, before returning to about 3 percent by year end, where it will remain during 2015.
“The last thing the central bank can do is cut the key rate,” Alfredo Coutino, director for Latin America at Moody’s Analytics, said by phone before yesterday’s decision. “The bank will have to reverse monetary easing sooner rather than later.”
Still, most economists expect a further rate reduction to 3.75 percent next month as the economy grows at the slowest pace since the 2009 recession, according to the central bank´s survey of economists. Guzman at Security Bank said he expected two more rate cuts this year.
The Imacec index, a proxy for gross domestic product, expanded 2.8 percent in March from a year earlier even though the month had an extra working day. The increase brought first-quarter expansion to about 2.4 percent.
Manufacturing has declined on an annual basis in eight of the past 12 months, while retail sales gained 5.2 percent in March, the slowest pace since October 2009.
Chile’s unemployment rate jumped to 6.5 percent in the first quarter from 5.7 percent in the fourth quarter and up from 6.2 percent in the year-earlier period.
Moreover, inflation expectations for a year ahead remain anchored at about 3 percent, even after the recent jump in prices, according to central bank surveys.
Further rate cuts will depend on how “domestic and external macroeconomic conditions” affect inflation, which currently merits “special attention,” the central bank said.