Chile Keeps Most Expansive Monetary Policy in the Americas

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Chile’s central bank left its benchmark interest rate unchanged for a 10th month, maintaining the most expansive monetary policy in the Americas even as the peso slumps and inflation accelerates.

The policy committee, led by bank President Rodrigo Vergara, kept the key rate at 3 percent Thursday, following eight reductions in the year through October. The decision was forecast by all 26 analysts surveyed by Bloomberg.

Only war-ravaged Ukraine and recession-hit Russia have lower real interest rates among inflation-targeting central banks in the Americas and Europe. Chilean policy makers are able to maintain their stance because analysts expect inflation to return to the 3 percent goal within two years, even after 16 months outside the target range.

“The bank still has very limited space to move the rate either up or down, mostly due to the fall in currencies across the region,” said Felipe Alarcon, chief economist at EuroAmerica SA in Santiago. “The outlook remains for the central bank to keep the rate here until at least the first half of 2016.”

The benchmark interest rate is 1.6 percentage points below inflation, compared with 0.3 point in Peru and close to zero in Colombia. In Mexico, the key rate is 0.3 point above inflation and in Brazil the differential is 4.7 points.

Vergara said earlier this month that the key rate in Chile wouldn’t fall further for the “foreseeable future” as the weaker peso keeps inflation above the target range. The Chilean currency closed at a 12-year low Thursday.

Growth Concerns

The central bank has maintained an expansionary policy as the economic rebound forecast by the government last year falters.

The bank will report next week that gross domestic product shrank 0.25 percent in the second quarter from the previous three months, according to analysts surveyed by Bloomberg. That would be the biggest contraction since an earthquake devastated much of central-southern Chile in February 2010. Annual growth will ease to 1.7 percent from 2.4 percent, analysts predicted.

The downturn led Vergara to warn this month that the bank is preparing to cut its 2.25 percent to 3.25 percent growth forecast for this year.

Neither are there many signs of a pick-up any time soon. An index that measures business confidence, which the central bank has said is crucial to any acceleration in growth, slid to 42.1 last month from 47.2 the month before, according a survey by Icare and Adolfo Ibanez university.

Inflation Surge

While economic growth slows, price-growth has picked up. Inflation accelerated to 4.6 percent last month from 4.4 percent in June and has remained at or above the upper limit of the 2 percent to 4 percent target range since April 2014. That is the longest period above the goal since 2008.

Inflation “is expected to stay at these levels for longer than previously forecast,” the bank said in a statement accompanying Thursday’s decision. “The evolution of inflation expectations will continue to be monitored with special attention.”

Inflation has been driven higher by import costs following a 16 percent slump in the peso against the dollar over the past 12 months.

Caught between sluggish growth and above-target inflation, analysts expect the key rate to be kept on hold over the next year, according to a central bank survey of economists released this week.

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