Chile Keeps 5% Key Rate on Surging Economy and Slowing Inflation

Chile’s central bank kept benchmark borrowing costs unchanged for the 14th consecutive month yesterday, highlighting faster-than-forecast economic growth and easing inflation.

The bank board, led by the institution’s President Rodrigo Vergara, held the benchmark rate at 5 percent, as forecast by all 20 analysts surveyed by Bloomberg. The bank last changed borrowing costs in January 2012 with a quarter-point reduction that surprised economists.

While policy makers said internal demand is expanding faster than gross domestic product, there is little chance they will raise interest rates anytime soon after they highlighted easing inflation and a strong exchange rate, economist Matias Madrid said. Traders in the interest rate swap market forecast borrowing costs will remain on hold through at least June.

“They could have published a much tougher statement on eventual inflationary pressures or internal demand,” Madrid, chief economist at Banco Penta, said after yesterday’s decision. “The bias remains totally neutral.”

Two-year rate swaps, which reflect traders’ views of average borrowing costs, rose four basis points, or 0.04 percentage point, from the end of last month to 5.22 percent yesterday. That indicates traders expect growth to prompt a quarter-point rate increase by September, according to calculations by Banco de Chile.

Inflation Slows

While growth has exceeded analysts’ forecasts for six consecutive months, easing inflation is keeping pressure off the central bank board to raise rates, Nathan Pincheira, a senior economist at Banchile Inversiones, said by phone from Santiago March 12.

Inflation slowed to 1.3 percent in February from 1.6 percent in January, and compared with 3.55 percent in Mexico, 1.83 percent in Colombia and 6.31 percent in Brazil. Price-growth has remained below the central bank’s target range of 2 percent to 4 percent for three months.

Two-year breakeven inflation, which is derived from the difference between nominal and inflation-linked yields on swaps, declined 11 basis points to 2.86 percent yesterday from the end of last month.

“The central bank needs stronger evidence that inflation could be faster than the central bank wants for it to make changes,” Pincheira said. “Evidence just needs to be firmer.”

Growth Outlook

Policy makers eventually need to tighten monetary conditions as economic growth rates threaten to put pressure on inflation, Alfredo Coutino, Latin America director at Moody’s Analytics, said March 13.

GDP in the world’s top copper producer expanded 5.6 percent last year and will climb 4.8 percent in 2013, the fastest growth among major Latin American economies after Peru, according to analysts polled by Bloomberg.

Brazil, which is Latin America’s largest economy, has cut its key interest rate 3.25 percentage points in the past year to shore up lagging growth, while Mexico last week reduced borrowing costs for the first time since 2009. Colombia has reduced rates six times since June.

While cutting rates in Chile would be a proactive step to protect against an expected economic slowdown later this year, policy makers ruled out that option last month amid concern that inflationary pressures would increase, according to minutes of the Feb. 14 meeting posted on the central bank website.

“Domestic risks have gained importance, at least in the short term,” Vergara said on March 6 in a speech in Santiago. “Output and demand indicators exceeded forecasts over the last year.”

‘Sooner or Later’

Unemployment fell to 6 percent in the three months through January from 6.6 percent the year before as wages expanded 4.3 percent above inflation in the first month of 2013 from the year earlier, according to government data. Retail sales surged 9.5 percent in January after climbing 8.8 percent in 2012.

“Domestically, output and demand indicators have exceeded forecasts,” the central bank said in a statement accompanying yesterday’s decision. “Economic activity reflects improvements in mining, while demand growth, driven by investment, is outpacing GDP. The labor market is still tight.”

Chile’s peso has responded to the economic growth by strengthening 2.3 percent against the U.S. dollar in the past 12 months, the best performance among major Latin American currencies tracked by Bloomberg after Peru. The peso fell less than 0.1 percent to 471.44 per dollar yesterday.

“Sooner or later inflation is going to respond positively to the pressures coming from fast economic growth,” Coutino said by phone from West Chester, Pennsylvania.

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