Chile Keeps Rate at 5% as Policy Makers Weigh Dual-Speed Economy

Chile’s central bank kept borrowing costs unchanged yesterday for a 16th consecutive month as policy makers weigh the impact of a consumer spending boom and stagnant manufacturing output.

The bank board, led by the institution’s president, Rodrigo Vergara, held the benchmark rate at 5 percent, as forecast by all 17 analysts surveyed by Bloomberg. The bank last changed rates in January 2012 with a quarter-point reduction that surprised economists.

Chilean retail sales leaped 10.2 percent in March from the year earlier, while manufacturing contracted 3 percent, the most since September. With the unemployment rate near a record low and wages rising almost six times faster than prices, there isn’t enough evidence of a sustained slowdown to justify monetary easing, even as the inflation rate falls to a three-year low, economist Cristobal Doberti said.

“Any changes would be next year,” Doberti, chief economist at BICE Inversiones, said by phone from Santiago on May 15. “Yes, growth and inflation eased. But that basically can be explained by short-term factors that won’t be repeated.”

The economy as measured by the central bank’s Imacec index, a proxy for gross domestic product, grew 3.1 percent in March from the year before, the slowest pace in 20 months. Analysts polled by Bloomberg had forecast a 4.7 percent increase. The bank is scheduled to publish April data next month.

Slowing Down

“First-quarter indicators show decelerating output and demand,” while copper prices have declined in the past few weeks, the bank said in a statement accompanying yesterday’s decision. Chile is the world’s largest copper producer.

Still, there is more optimism over the outlook for the U.S. and Japanese economies, policy makers said.

Slower growth and annual inflation of 1 percent in April have convinced many traders that borrowing costs will fall this year.

Two-year interest rate swaps declined 22 basis points, or 0.22 percentage point, to 4.46 percent yesterday from April 30. That implies policy makers will reduce the key rate to 4.50 percent by August and 4.25 percent by February, according to calculations made by Banco de Chile.

Investment, which has driven growth in the past two years, is beginning to slow, economists at the central bank said in a report released May 15. Housing sales and building materials show a less dynamic real estate industry, while the growth in imports of capital goods has weakened, they said.

Still, the evidence of a slowdown in consumer spending is less conclusive, the economists said.

Rebound Expected

Economic growth will pick up later this year, with GDP climbing 4.9 percent in 2013 after expanding 5.6 percent in 2012, according to analysts polled by Bloomberg. That would be the fastest growth among major Latin American countries behind Peru, according to the survey.

“The economic deceleration won’t remain as deep as we’ve seen,” Matias Madrid, chief economist at Banco Penta, said by phone May 15 from Santiago. “In fact, growth will recover soundly in April.”

Unemployment fell to 6.2 percent in the first quarter from 6.6 percent in the year-ago period, while wages expanded 5.9 percent in March after climbing 6.3 percent last year. The surge in March retail sales was the biggest jump since an 11 percent increase in December.

Staying Optimistic

Consumer confidence in March declined two points to 56.8 from the end of 2012 while remaining above the “optimistic” threshold of 50 for the 10th consecutive month, according to Chilean polling company Adimark GfK. The IPSA stock exchange index has declined 0.9 percent this year after rising 3 percent in 2012.

“Recent economic data show some signs of deceleration,” Vergara said in a prepared remarks last week in Santiago. “However, there are no major changes in private consumption trends.”

While inflation last month eased to 1 percent from 1.5 percent in March, policy makers forecast consumer prices will rise 2.8 percent this year and 3 percent in 2014. The central bank targets 3 percent inflation, plus or minus one percentage point over two years.

“Today risks are inflationary for 2014,” Jorge Selaive, an economist at Banco Bilbao Vizcaya Argentaria SA and the most-accurate forecaster of monthly inflation in two years of Bloomberg polling, said May 15 in an e-mailed response to questions. Rate cuts “would add a lot of fuel to the fire in inflationary terms.”

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