Chile Benchmark Rate Enters Second Year at 5% on Steady Growth

Chile kept the key interest rate unchanged yesterday for a 13th straight month as the central bank balances South America’s slowest inflation with the region’s second-fastest growth rate.

Policy makers, led by bank President Rodrigo Vergara, held the benchmark rate at 5 percent, as forecast by all 17 analysts surveyed by Bloomberg. The bank last changed borrowing costs in January 2012 with a quarter-point reduction that surprised economists.

The central bank board had little reason to change interest rates as economic growth remains robust and inflation keeps below the target range, said Sebastian Senzacqua, investment analyst at Bice Inversiones. Traders in the interest rate swap market forecast borrowing costs will remain on hold for at least three months.

“Our base scenario is for rates to remain steady, but we don’t rule out an increase if inflation advances faster than we expect,” Senzacqua said by phone from Santiago after the decision yesterday. “Toward the end of the year, the central bank could change its bias a little and be a bit more restrictive.”

Two-year rate swaps, which reflect traders’ views of average borrowing costs, declined one basis point, or 0.01 percentage point, to 5.22 percent yesterday from the end of last month. That indicates traders expect the key rate to rise a quarter-point to 5.25 percent by August, according to calculations by Banco de Chile.

No Pressure

The central bank is in no rush to raise rates because inflation has remained below the lower limit of its 2 percent to 4 percent target range for two straight months after starting last year above the band, Rodrigo Aravena, chief economist at Banchile Inversiones, said Feb. 11.

Traders and investors surveyed Feb. 12 by the central bank estimated inflation will accelerate to 3 percent in a year from 1.6 percent in January, staying at the mid-point of the target range through February 2015.

“We don’t yet see the kind of pressure that would justify a rate increase,” Aravena said by phone from Santiago. “The central bank must be sure of several things before it raises the interest rate. In the first place, it must be sure inflation projected out two years from now will be above 3 percent.”

At 3.4 percent, Chile has the highest inflation-adjusted borrowing costs in the world after Ukraine, which has 7.7 percent, and China, at 4 percent, according to data compiled by Bloomberg. Chile’s real borrowing costs are more than three times higher than those of Brazil, Latin America’s largest economy.

Economic Growth

High real interest rates haven’t curbed economic growth. Unemployment fell to 6.1 percent at the end of 2012 from 6.6 percent a year earlier, while wages climbed 4.7 percent above inflation in December -- the fastest gain in three years.

“Domestically, recent output and demand indicators exceeded forecasts,” the central bank said in a statement accompanying yesterday’s decision. “The labor market is still tight.”

Chile’s economy grew 5.45 percent last year, according to analysts surveyed by Bloomberg, compared with 6.2 percent in Peru and 1 percent in Brazil.

In December, Chile’s economy expanded a seasonally-adjusted 1.2 percent in the month, the second-fastest rate in 2012, on gains in retail and services. Internal demand is driving gains, with retail spending climbing 8.8 percent in 2012 and supermarket sales rising 7.4 percent.

Raising interest rates to cool that growth would put pressure on the peso, which has appreciated 2.8 percent against the U.S. dollar in the past three months, said Alberto Ramos, an economist at Goldman Sachs Group Inc.

On the other hand, any temptation to reduce borrowing costs will be tempered by concern that easing monetary policy would stimulate an economy that doesn’t need an additional boost, he said.

“There is nothing that looks imminent on the rates front, unless you see the macro reality shifting,” Ramos said by phone before yesterday’s decision. “It could shift like that. It’s not going to stay like this forever.”

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