• Chile has forecast one or two rate rises over next 10 months
  • Peru's CPI expectations steadied by September's surprise hike

Central banks in Chile and Peru paused after raising interest rates for the first time in four years in the past two months as slower inflation gives policy makers room to maintain stimulus.

Chile’s central bank board kept its benchmark rate at 3.25 percent Thursday, as forecast by 20 of 28 economists surveyed by Bloomberg. Peru’s central bank maintained its key lending rate at 3.5 percent, as forecast by all 17 economists.

Slower price growth in October is providing temporary respite to policy makers in Chile and Peru while inflation remains above target in both economies. Chilean central bank President Rodrigo Vergara last week said one or two more rate increases are likely over the next 10 months while Peru’s central bank also has said it plans to raise rates gradually.

Growth in both economies should gather pace in the months ahead and their central banks are likely to “raise rates slowly to anchor inflation expectations within the target range,” said Luis Ordonez, research manager at Inteligo SAB, said by phone from Lima.

Analysts surveyed by Chile’s central bank this week said inflation, currently at 4 percent, would return to the 3 percent goal within two years. With inflation expectations anchored at the target, the country’s central bank has vowed to retain monetary stimulus amid economic weakness, saying the key rate won’t reach the neutral level of 4.5 percent to 5 percent any time soon.

There are tentative signs of an pick-up in Chile’s economy. Economic activity rose at the fastest pace in two years in September, fueled by an unexpected rise in manufacturing that helped lift industrial production for the third time this year.

“There should be another increase toward the end of the first quarter,” said Antonio Moncado, an economist at Banco de Credito e Inversiones in Santiago.

Peru’s economy is expanding at the fastest pace in a year on a surge in copper output. Still, consumer demand and construction activity remain weak.

Inflation expectations have stabilized after September’s surprise rate increase, giving the central bank leeway to maintain its expansive policy stance, said Luis Gonzalez-Prada, an analyst at Apoyo Consultoria.

Consumer prices rose 0.14 percent in October, while annual inflation slowed for a second month to 3.66 percent. Analysts surveyed by the central bank in October saw 3.2 percent inflation for 2016, down from 3.3 percent in September, after rising for four consecutive months.

“Domestic demand remains cold so for that part of the economy, stimulus is still needed,” Gonzalez-Prada said by phone from Lima.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE