Chile Keeps Rates on Hold as Inflation Stays Above Target

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Chile’s central bank kept borrowing costs unchanged for a sixth straight month as economic growth remains sluggish and inflation stays above the target range.

Policy makers, led by bank President Rodrigo Vergara, left the benchmark interest rate at 3 percent Thursday, as forecast by all 27 economists surveyed by Bloomberg.

The central bank has paused after cutting rates eight times in the year through October as inflation exceeded the target range for 12 consecutive months. Vergara said last week that rates probably will rise toward year-end or at the beginning of 2016 as an economic recovery gains momentum. The economy grew at the slowest pace in five years in the third quarter before picking up in the fourth.

“Even if high inflation is a concern, we still don’t see a consistent recovery in economic activity that gives space for rate hikes,” Andres Osorio, an economist at IM Trust-Credicorp Capital in Santiago, said in an e-mailed note. “A rate increase could affect this gradual recovery.”

Consumer prices rose 4.2 percent in March from the year earlier, compared with the bank’s 2 percent to 4 percent target range. Core inflation, which excludes fuel and produce, has accelerated for 21 of the past 22 months, reaching 5.5 percent in March.

Policy makers last month raised their inflation forecast for this year to 3.6 percent from a previous estimate of 2.8 percent. They also said inflation will be 3.2 percent by December 2016, the highest forecast for the last three months of the two-year outlook in 11 years.

Biggest Risk

“The annual change of the CPI is still high, and its evolution will continue to be monitored with special attention,” the bank said in a statement accompanying the rate decision.

The biggest risk is that inflation expectations rise after price-growth remained above the target range for longer than analysts expected, according to the shadow Monetary Policy Group.

“We recommend keeping the rate in its current 3 percent level, though with a tightening bias, awaiting more information of a convergence scenario of inflation toward its goal,” the group of five economists, who are independent of the central bank, said Wednesday.

Inflation expectations remain anchored at 3 percent for the coming two years, according to a poll published by the central bank on April 10.

The main factor behind the persistence of higher inflation is the depreciation of the peso, Vergara reiterated April 10. The peso has fallen 8.9 percent against the dollar over the past year. The labor market has also remained tighter than forecast, the bank said, keeping nominal wage growth at 7.1 percent in February.

Chile’s gross domestic product expanded 1.8 percent in the fourth quarter from the year earlier, compared with 1 percent in the previous three months.

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