Chile and Peru Keep Rates at Their Lowest Level in Four Years

Chile and Peru kept borrowing costs unchanged as high inflation and currency pressure prevent their policy makers from doing more to support growth.

Chile’s central bank board kept the benchmark interest rate at 3 percent Thursday, as forecast by all 25 economists surveyed by Bloomberg. Peru’s central bank maintained its key lending rate at 3.25 percent, as forecast by all 17 economists.

The two Andean economies are recovering more slowly than expected after a slump in prices for copper, their main export, damped investment and consumer demand. Inflation has remained above policy makers’ target range in Chile for the past year while a slump in Peru’s sol to a six-year low makes the central bank wary of using rate cuts to stimulate growth.

“In Chile the economy has turned, though they won’t be in a hurry to hike rates,” said Rafael de la Fuente, chief Latin America economist at UBS AG, by phone from New York. “In Peru further rate cuts are probably harder to justify now, especially considering the move we’ve seen in the currency.”

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.

Growth remains sluggish this year. Manufacturing contracted 2.8 percent in March from the year earlier, while retail sales gained 0.4 percent.

Policy Balance

Some recent indicators suggest less dynamic economic growth “in the margin,” Chile’s central bank said in a statement accompanying the rate decision. With prices rising more than forecast in April, policy makers said they will continue to monitor inflation with “special attention.”

Consumer prices rose 0.6 percent in April, leaving annual inflation at 4.1 percent, compared with the 3.9 percent medium estimate of analysts polled by Bloomberg.

In Peru, policy makers are using alternatives to rate cuts to fuel a rebound in growth without weakening the currency, which slumped 5.4 percent this year, the second-worst performance among Latin American’s most-traded currencies.

In the past two weeks, the monetary authority cut reserve requirements for a ninth consecutive month and approved measures to increase money supply by auctioning government sol deposits and purchasing lenders’ loan portfolios.

In a statement accompanying its decision Thursday, the board said the current rate is compatible with inflation converging to 2 percent during 2015 and 2016. It also cited “high volatility” in external currency markets among the reasons for leaving the rate unchanged.

“The most recent indicators of economic activity and business and consumer confidence continue to show a weak economic cycle,” the board said in its statement. The board is ready to consider changes to its monetary policy tools if needed, it said.

Economists surveyed by Peru’s central bank last month cut their projection for economic growth to 3.1 percent for 2015 from 3.6 percent in March. Economists raised their 2015 inflation forecast to 2.9 percent from 2.7 percent.

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