Chile and Peru Keep Key Rates Unchanged Amid Sluggish Growth

Chile and Peru kept borrowing costs unchanged at a four-year low as high inflation deters policy makers from doing more to boost weak domestic demand.

Chile’s central bank kept the benchmark interest rate at 3 percent Thursday, as forecast by all 27 economists surveyed by Bloomberg. Peru’s central bank maintained its key lending rate at 3.25 percent, as forecast by all 20 economists.

The two Andean economies are recovering more slowly than expected after the end of a decade-long boom in copper, their main export, damped investment and consumer demand. Inflation remains around the top end of the target range in Chile and above target in Peru after a year in which their currencies fell 12 percent and 11 percent against the dollar respectively.

Chile’s rate is “pretty expansionary, but they have room to do that,” said Italo Lombardi, an economist at Standard Chartered Bank, by phone from New York. “Peru is comfortable with rates where they are for now and is focusing on the currency given it’s a very dollarized economy.”

Both countries’ central banks cut their 2015 growth forecasts in the last month as weak business sentiment delays a rebound in private investment.

‘Weakness’

Economic activity in Chile expanded less than analysts forecast in April, while exports and imports slumped at the fastest pace in six years the month after.

Chile’s “economy is still showing signs of weakness and the central bank thinks that will aid an additional reduction in inflation,” said Alfredo Coutino, director for Latin America at Moody´s Analytics Inc., a unit of Moody´s Corp.

The nation’s consumer prices climbed 4 percent in May from the year earlier, compared with the 2 percent to 4 percent target range.

While Chilean policy makers likely will raise rates in the fourth quarter as growth picks up, Peru’s recovery may take longer given investor caution before presidential elections next year, Lombardi said.

Convergence

Peru’s economy expanded 1.6 percent in the year through March, compared with 5.8 percent in the year-earlier period, as mining investment contracted and exports slumped.

Policy makers are using alternatives to rate cuts to boost growth. The monetary authority cut reserve requirements for a 10th consecutive month on June 1 and tightened controls on derivatives trading in an effort to curb sol volatility.

Faster food and energy price inflation in Peru has prevented inflation from converging to the central bank’s target range, even as domestic demand eases.

The annual inflation rate quickened to 3.37 percent last month. The central bank targets inflation in a range of 1 percent to 3 percent.

Inflation will start converging to target and be close to 3 percent by December or January, central bank President Julio Velarde said in Rio de Janeiro Thursday.

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