Chile Leaves Latin America’s Highest Real Borrowing Cost on Hold

Chilean policy makers kept borrowing costs unchanged yesterday at almost double the real rate of any other Latin American nation as President Sebastian Pinera said the country was approaching full employment.

The monetary policy board, led by central bank President Rodrigo Vergara, held the benchmark interest rate at 5 percent, as forecast by all 18 analysts surveyed by Bloomberg. Chile’s real interest rate of 3.5 percent compares with Colombia’s 1.81 percent and 1.41 percent in Brazil, the region’s largest economy, according to data compiled by Bloomberg.

While steeper borrowing costs have helped drive Chile’s inflation rate to the lowest in the region, it hasn’t damped growth, which exceeded analyst estimates in each of the last four months. Policy makers will be reluctant to change the benchmark rate this quarter as a cut would threaten to stoke inflation, while an increase may extend a rally in the peso, undermining exports.

“There is limited space for an increase in the monetary policy rate in the short term,” Sebastian Senzacqua, an economist at BICE Inversiones, said by phone after yesterday’s decision. “Rates could move toward the end of the year if the external scenario improves significantly, our economy continues to evolve favorably and inflation becomes more dynamic.”

Policy makers in a statement accompanying yesterday’s decision highlighted “more favorable” financial conditions abroad with lower fiscal risk in the U.S. and “more positive” signs from China.

‘More Hawkish’

“The tone of the statement is slightly more hawkish than the one released in December,” Italo Lombardi, an economist at Standard Chartered Bank in New York, wrote in a note e-mailed to investors yesterday. “Markets are pricing at least one 25 basis-point hike this year, and the curve could move further, pricing additional hikes.”

The central bank statement also mentioned the exchange rate for the second straight month, though it only said that the peso had appreciated “slightly” against the dollar.

The Chilean currency, which has gained 5.4 percent against the dollar in the past 12 months, gained 0.6 percent yesterday to 472.25 per dollar. Policy makers last intervened in the currency market in 2011 by buying dollars in the spot market after the peso was trading at 465.75 to the dollar.

While Pinera told reporters yesterday the government is concerned that a stronger peso is reducing margins for some exporters, the exchange rate has helped slow inflation as the price of imports fall.

Slowing Inflation

Inflation eased to 1.5 percent last month from 4.4 percent at the end of 2011. Colombia has the second-lowest inflation rate among major Latin American countries with 2.44 percent.

While Chilean inflation will double within a year, 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.

“Inflation is completely under control,” Pinera, a Harvard University-trained economist, said yesterday. “Chile is one of the fastest-growing countries in the world and is creating jobs. We’re nearing a situation of full employment.”

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.

Chile posted its quickest growth in 11 months in November, expanding 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 from 6.7 percent in October.

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.

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