Chile Holds Rates on `Feeble' Growth, Above-Target Inflation

  • Key rate kept at 3.5% after December's quarter-point increase
  • Central bank has said it will raise rates gradually this year

Chile’s central bank paused after raising interest rates twice in the previous three months as data confirmed weak economic growth persisted into the last quarter of 2015, even as inflation rose back above the target range.

Policy makers, led by bank President Rodrigo Vergara, left the benchmark interest rate at 3.5 percent Thursday, as forecast by all 23 economists surveyed by Bloomberg.

The central bank has said Chile requires “gradual and prudent” rate increases that keep a lid on inflation while enabling a recovery in what policy makers last month described as “feeble” growth. With business confidence at similar levels to those during the 2009 recession and with little sign of a recovery, the central bank is in no hurry to raise rates.

“Today’s decision is supported by low activity numbers that suggest it’s preferable to have an expansive monetary policy,” said Andres Osorio, an economist at Credicorp Capital in Santiago. “We forecast another hike in the second quarter, though there could be a change in timing depending on local inflation and activity and what the Fed does.”

Pressure on growth in the world’s largest copper producer increased further in the past week as the metal fell below $2 per pound for the first time since 2009. Finance Minister Rodrigo Valdes said the government would have to slow spending increases to avoid a jump in borrowing.

The central bank has cut its growth forecasts seven times since March 2013 and now estimates expansion of 2 percent to 3 percent this year, with the risks on the downside.

“Data from the fourth quarter continues to indicate limited growth in activity and domestic demand,” the central bank said in a statement accompanying today’s rate decision. “The future path of the monetary policy rate considers measured adjustments aimed to ensure the convergence of inflation to the target.”

Currency Pressure

While growth remains in the doldrums, the annual inflation rate rose back above the 2 percent to 4 percent target range in December as a weaker peso pushed up import costs. Consumer prices rose 4.4 percent from the year earlier, compared with 3.9 percent the month before. Since then, the peso has weakened further, dropping 2.3 percent against the dollar since Jan. 1, hitting a 12-year low on Jan. 11.

“If copper prices continue at such low levels and the peso depreciates further, the central bank could be in a dilemma that it didn’t have in its base scenario: higher inflation and economic activity that doesn’t rebound,” Osorio said.

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