Chile Keeps 5% Rate as Inflation Slowdown Defies GDP Growth

Chilean policy makers kept borrowing costs on hold today for the 12th consecutive month after faster-than-expected economic growth didn’t stop the inflation rate falling to the lowest level in Latin America.

The monetary policy board, led by bank President Rodrigo Vergara, held the benchmark interest rate at 5 percent, as forecast by all 18 analysts surveyed by Bloomberg. Policy makers last changed the rate in January 2012 with a quarter-point reduction that surprised economists.

The second-highest borrowing costs among major rate-setting banks in Latin America have helped contain consumer prices while allowing Chile’s economy to climb at a faster pace than all save one of its regional peers. Policy makers will be reluctant to change rates unless inflation quickens faster than expected, economist Rodrigo Aravena said.

“It’s very, very unlikely that we’ll see a move in the rate between now and March,” Aravena, chief economist at Banchile Inversiones, said by phone from Santiago yesterday. “From that point on, if there’s a change it would be an increase driven principally by local factors.”

Two-year interest rate swaps, which reflect traders’ views of average borrowing costs, rose seven basis points, or 0.07 percentage point, to 5.23 percent yesterday from a month earlier. That indicates traders expect the key rate to rise a quarter-point to 5.25 percent by July, according to calculations by Banco de Chile.

Outpacing Peers

The world’s top copper miner has the highest key interest rate among major rate-setting Latin American banks behind Brazil, which has cut borrowing costs to 7.25 percent from 12.5 percent in July 2011. Colombia’s central bank also reduced rates in its past two meetings to boost economic growth, while Peru and Mexico have kept them unchanged.

“Future changes in the monetary policy rate will depend on the implications of domestic and external macroeconomic conditions on the inflationary outlook,” the central bank said in a statement accompanying today’s decision.

Chile is on track to post the fastest economic growth among major South American economies for 2012 and 2013 behind Peru, expanding an estimated 5.5 percent in 2012 and 4.8 percent this year, according to the United Nations economic unit for Latin America and the Caribbean.

Economic Growth

In November, Chile posted its quickest growth in 11 months, increasing 1.3 percent from the month before on gains in the service, mining and retail industries, according to central bank data. Growth on an annual basis slowed to 5.5 percent in November from 6.7 percent in October.

“Domestically, recent data for activity and demand have evolved in line with expectations,” the central bank said in today’s statement. “The labor market remains tight.”

Unemployment fell to 6.2 percent in the three months through November, surprising economists who expected the rate to remain unchanged at 6.6 percent, while wages grew an annual 6.5 percent that month, more than four times faster than inflation. Retail sales surged 10.7 percent over the same period, out-pacing the manufacturing index that grew 0.8 percent.

“The economy is running at rates that are higher than its potential,” Alfredo Coutino, Latin America director at Moody’s Analytics, said by phone Jan. 11 from West Chester, Pennsylvania. “As pressures on domestic demand accumulate, inflation will start a trend of acceleration probably around May or June of this year and that is going to force the central bank to start hiking the interest rate.”

Slowing Down

For now, inflation continues to slow, dropping from 4.4 percent at the end of 2011 to 1.5 percent last month. Colombia at 2.44 percent had the second-lowest inflation rate among major Latin American countries last year.

And while inflation will double within a year to 3 percent, it won’t exceed the central bank target range of 2 percent to 4 percent, according to the median estimate of 56 traders and investors surveyed by the central bank on Jan. 8.

The Chilean peso has appreciated 3.7 percent against the dollar in the past six months, driving down the cost of imports as it helps to keep inflation rates low, Felipe Jaque, an economist at BBVA Research in Santiago, said by phone. Raising rates further may put more pressure on the peso to appreciate.

Chile’s government is concerned a stronger exchange rate is hurting exporters whose costs are in pesos, Finance Minister Felipe Larrain told reporters in Santiago Jan. 15. The government last week met with policy makers to discuss the peso gains, he said without giving details of talks.

“The peso supports the idea of not raising interest rates,” Jaque said.

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