Chile Keeps Key Rate for 11th Month Amid Economic Weakness

  • Bank shifts to tightening bias with `short-term' timeline
  • Cites need to cut monetary stimulus to hit inflation target

Chile kept borrowing costs unchanged for an eleventh month as long-term inflation expectations remain aligned with policy makers’ target amid slack domestic demand and faster-than-expected consumer price increases.

Policy makers, led by bank President Rodrigo Vergara, left the benchmark interest rate at 3 percent Tuesday, as forecast by 25 of 30 economists surveyed by Bloomberg. The bank’s board did change its bias from neutral, saying “that the convergence of inflation toward 3 percent in the policy horizon will require reducing the current strong monetary stimulus.”

“There is a very high chance the bank will hike by year-end or the beginning of 2016,” Andres Osorio, economist at IM Trust Credicorp Capital, said by telephone after the decision. “It is undeniable that the easing cycle is coming to an end and that they are committed to hiking to prevent inflation from de-anchoring” from expectations.

Chilean consumer prices rose more than forecast in August, fueling speculation that the central bank might move up the onset of monetary policy tightening to before year-end. Policy makers in their statement announcing Tuesday’s decision said that “given recent data, it is foreseeable that this process will start in the short-term”

“What is very clear is that there has been a change in the bias and they
explicitly say they will raise rates in the short-term," Osorio said. “We don’t think a hike is so imminent or necessary now, the easing cycle will
be subject to the Fed’s actions."

Inflation Expectations

Vergara said on Sept. 3 that interest rates would probably be raised in line with market expectations, with two quarter-point increases in the next 12 months and another 25 basis-point gain in the six months after that.

Consumer prices rose 5 percent in the 12 months through August and have been at the top end or above the central bank’s 2 percent to 4 percent target range since April 2014. While economists’ expectations for inflation in two years time have held steady at 3 percent since mid-2011, the outlook for both 2015 and 11 months time have deteriorated.

Inflation is likely to stay above 4 percent at least throughout the first half of 2016 and return to 3 percent over the course of 2017, Vergara said Sept. 8 in London. The last time inflation remained above target for so long was August 2007 to February 2009.

Policy makers last month expressed concern that in the short term the weakness in the peso, which has declined 11.5 percent this year, will lead to faster price rises, the minutes of their August meeting showed.

Gradual Recovery

Chile’s economy expanded more than expected in July, led by service industries and electric utilities, while exports tumbled to the lowest level in six years in August amid a slump in copper prices.

The central bank and government have both cut their growth forecasts in the past two months as a 10-year mining boom comes to an end. Policy makers cut their 2015 estimate on Sept. 1 to 2 percent to 2.5 percent, while the government reduced its forecast to 2.5 percent from a previous 3.6 percent.

Vergara said Sept. 3 that in the bank’s base scenario for any economic recovery will be "gradual and modest." Second-quarter data showed a greater weakness in activity and demand, while business and consumer confidence deteriorated, policy makers said in the quarterly report. The bank "expects growth to be less than anticipated in the second half."

Growth in Latin America’s wealthiest nation will accelerate to 2.3 percent this year, exceeding the region’s average by more than 2 percentage points, according to economists surveyed by Bloomberg.

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