Chile Central Bank Keeps Key Rate at 3.5% as Inflation Slows

  • Borrowing costs kept unchanged for the fifth consecutive month
  • Central bank seen raising rates a quarter point by year end

Chile’s central bank kept borrowing costs unchanged for the fifth consecutive month as inflation slowed toward the target range, while maintaining its tightening bias.

Policy makers, led by central bank President Rodrigo Vergara, left the key rate at 3.5 percent Tuesday, as forecast by all 20 economists surveyed by Bloomberg. The pause in rates comes after two increases late last year.

The inflation rate fell for the third consecutive month in April, dropping to 4.2 percent from 4.5 percent the month before, after spending most of the past two years above the 2 percent to 4 percent target. Inflation expectations are now beginning to ease, reducing pressure on the central bank to tighten monetary policy. Still, the bank reiterated that it envisaged a gradual “normalization” of rates in order to bring inflation to 3 percent. Whether it will maintain that bias is up for debate.

“It is very possible that the central bank keeps its tightening bias until inflation shows signs that it is under control," said Cesar Guzman, an economist at Banco Security SA in Santiago. “There is no rush.”

Economists still expect policy makers to raise rates by a quarter point by year end and to 4 percent within 23 months as the economy begins to pick up after more than two years of sluggish growth, according to central bank surveys.

Unemployment Rises

“In order to ensure the convergence of inflation to the target, it will require a normalization of monetary policy,” the central bank said in a statement accompanying today’s decision. “The pace of that will depend on new information” and its implications for inflation.”

The pick-up in growth expected for 2017 is far from a forgone conclusion. The jobless rate climbed to 6.3 percent in the first quarter from 5.9 percent in the month-earlier period.

“The bank’s statement highlights that the local context could have been more dynamic, with confidence still weak and labor market deteriorating,” Guzman said.

The rise in unemployment is damping wage growth. In March, nominal wage rose 5.4 percent from the year earlier, unchanged from the month before and the second-slowest pace in more than two years. Retail sales gained 1.43 percent in March, the smallest gain in 12 months.

Chile is likely to see more increases in unemployment in the coming months, Vergara told a group of more than 200 executives at an event in London last week. Still, the economy is “in a good condition to face challenges posed by external events and resume high growth rates,” he said.

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