Chile Keeps Region’s Highest Key Rate Unchanged as Growth Eases

Chile’s central bank kept its benchmark lending rate unchanged for the 15th consecutive month yesterday as South America’s fastest-growing economy after Peru starts to show signs of cooling.

Policy makers, led by bank President Rodrigo Vergara, held the key rate at 5 percent, as forecast by all 13 analysts surveyed by Bloomberg. Chile’s inflation-adjusted interest rate is 3.5 percent, the highest among major Latin American economies.

The decision to keep rates unchanged, even as inflation slows below the target range, is beginning to have an impact. The world’s largest copper producer grew at the slowest pace since September 2011 in February, after exceeding analyst and central bank forecasts last year, easing pressure for tighter monetary policy. The bank took note of the slowdown in a statement accompanying yesterday’s decision.

“It signaled something of a deceleration could be coming if you consider credit conditions and the fact that data for February were below expectations,” Felipe Jaque, an economist at Banco Bilbao Vizcaya Argentaria SA, said by phone from Santiago after the decision. “This is incipient.”

Two-year interest rate swaps, which reflect traders’ views of average borrowing costs, fell 14 basis points, or 0.14 percentage point, to 4.95 percent yesterday from the end of March. That implies policy makers will reduce borrowing costs over the 24-month horizon after swaps in March pointed toward an eventual increase, according to calculations made by Bloomberg.

Slowing Down

The economy as measured by the Imacec index, which is a proxy for gross domestic product, expanded 3.8 percent in February from the year before, the central bank said in a report published April 5. From the month earlier, the index contracted a seasonally-adjusted 0.1 percent.

Credit is tightening as the supply of loans for builders and households becomes more restrictive, the central bank said in a survey of banks published April 10.

“February’s activity indicator was below market expectations,” the central bank said in a statement accompanying yesterday’s decision. “Credit conditions are somewhat more restrictive.”

Retail sales in February expanded 7.4 percent, the slowest increase in four months, while manufacturing output climbed 0.9 percent after increasing 4.1 percent in January.

Forecast Revised

The slowdown comes at the same time that policy makers this month raised their 2013 growth forecast by a quarter-point to a range of 4.5 percent to 5.5 percent, adding in the April 2 report that growth still threatens to put pressure on consumer prices. Analysts polled by Bloomberg forecast GDP will climb 4.8 percent in 2013, the fastest pace in South America behind Peru.

The economy expanded 5.6 percent last year.

Inflation rates will climb as well, increasing to 2.8 percent by year-end from 1.5 percent in March, according to central bank forecasts. Still, 2.8 percent is less than the 2.9 percent forecast by policy makers in December and below the mid-point of the 2 percent to 4 percent target range, indicating the central bank board may not see the need to tighten policy any further.

“The central bank has sent a message that it doesn’t have extremely powerful motives to increase rates soon,” Banchile Inversiones economist Nathan Pincheira said by phone from Santiago.