Chile Keeps Key Rate at 5% as Retail Boom Defies SlowdownPhilip Sanders
Chile’s central bank kept borrowing costs unchanged for a 17th straight month as booming retail sales defied a slowdown elsewhere in the economy, delaying a cut in rates that most analysts expect in the next few months.
Policy makers, led by bank President Rodrigo Vergara, held the benchmark rate at 5 percent today, as forecast by 15 of 19 economists surveyed by Bloomberg. The other four expected a quarter-point reduction. It is the longest period without a rate change in Chile since at least 1995.
Retail sales leaped 11.2 percent in April from the year earlier, the fastest pace since August, even as manufacturing growth stagnated and a four-year decline in unemployment slowed. Policy makers probably will cut the key rate to 4.75 percent next month as growth weakens and the inflation rate remains at the lowest in Latin America, economists surveyed by the central bank forecast this week.
“Recent evidence shows that the deceleration of activity and domestic demand continues,” the central bank said in a statement accompanying the decision. “The adjustment has been more marked in investment, while private consumption still shows dynamism.”
Policy makers debated the possibility of a rate cut at last month’s meeting, according to the minutes of the discussion released on June 3. Minutes from today’s meeting will be published June 28.
Chile’s Imacec index, a proxy for gross domestic product, grew 4.4 percent in April from the year before, less than the 5 percent forecast by analysts, even though the month contained two more working days than in 2012. Economic activity expanded 3 percent in March, the slowest pace in 20 months.
Inflation is also weakening. Prices rose 0.9 percent in the year through May, the least since April 2010 and compared with 2.46 percent in Peru, 2 percent in Colombia and 4.63 percent in Mexico. Chile targets inflation of 2 percent, plus or minus one percentage point.
Weaker growth and inflation pushed two-year interest rate swaps down 59 basis points, or 0.59 percentage point, to 4.51 percent today from April 1. That implies policy makers will reduce the key rate to 4.5 percent by September, according to calculations made by Banco de Chile.
Manufacturing growth averaged 0.42 percent over the three months through April from the year before, down from 4.25 percent in the fourth quarter of last year, according to the National Institute of Statistics.
Unemployment rose to 6.4 percent in April, compared with 6.1 percent at the end of 2012 and little changed from the year earlier. The jobless rate has tumbled from 11.6 percent in August of 2009.
“The central bank doesn’t have the space to cut rates yet,” said Felipe Alarcon, an economist at Banco de Credito e Inversiones in Santiago. “The key is domestic demand, which is still far from showing signs of deceleration.”
Retail sales have risen more than 10 percent in four of the past six months.
Strong demand justified keeping the benchmark rate unchanged last month, even as weaker inflation and growth argued for a rate cut, policy makers said in the minutes of the May meeting.
Economists surveyed by the central bank this week cut their forecast for growth in 2013 to 4.6 percent from 5 percent in the month earlier poll. They reduced their prediction for year-end inflation to 2.4 percent from the 2.5 percent forecast in May and 2.8 percent estimated in April.
“The central bank is in no hurry in terms of inflationary pressures,” said Alfredo Coutino, Latin America director at Moody’s Analytics. “The central bank sees that its monetary policies are in neutral terrain, as they don’t stifle growth and they keep inflation under control.”