Chile Keeps Rate on Hold as Inflation Rises and Growth Slows

Chile’s central bank kept its key interest rate unchanged for the 18th consecutive month as the economy begins to invert more than a year of robust growth and slowing inflation.

Policy makers, led by bank President Rodrigo Vergara, held the benchmark rate at 5 percent today, as forecast by 12 of 17 economists surveyed by Bloomberg. The other five expected a quarter-point reduction. It is the longest period without a rate move in Chile since at least 1995.

Consumer prices jumped the most in seven months in June, even after manufacturing fell at its fastest annual pace in more than three years the month before. While inflation remains below the target range, growth has eased more than forecast, policy makers said in a report published July 1, indicating they probably will cut interest rates this year.

“The consolidation of the trends outlined in the last Monetary Policy Report could call for adjustments to the monetary policy interest rate in the coming months,” the central bank said in a statement accompanying today’s decision.

The bank is waiting for consumer demand to weaken before taking action, said Sebastian Brown, an economist at Barclays Plc in New York.

“If you just cut rates with full employment you run the risk of creating a bubble,” Brown said. “We will need to see weaker demand and worse unemployment numbers.”

The minutes from today’s meeting will be published on July 30.

Slowing Down

The jobless rate fell to 6.4 percent in the three months through May from 6.7 percent the year before and from a high of 11.6 percent in July 2009.

Economists expect the central bank to cut the key rate by half a percentage point within five months, according to a survey by the bank released yesterday.

The Imacec index, a proxy for gross domestic product, grew 3.5 percent in May from the year earlier, below the 3.9 percent median forecast of economists polled by Bloomberg.

Manufacturing tumbled 4.2 percent over the same period, its largest decline since the aftermath of an earthquake in February 2010 that devastated much of the south of the country. A 13.2 percent jump in retail sales prevented the economy from slowing still further.

The reports indicated that the economy extended a slowdown that saw expansion ease to 4.1 percent in the first quarter from 5.6 percent in 2012.

Sharp Adjustment

“Activity and demand decelerated and, while a moderation in their pace of expansion was expected and desirable, the first quarter showed a sharper adjustment than expected,” Vergara told lawmakers on July 1 when the bank released its quarterly inflation report.

Policy makers reduced their forecast for economic growth this year to between 4 percent and 5 percent from 4.5 percent to 5.5 percent.

As growth slows, inflation is picking up. Prices leaped 0.6 percent in June, the largest increase since September, pushing annual inflation to 1.9 percent from 0.9 percent the month before. The central bank targets inflation of 3 percent, plus or minus one percentage point.

Two-year break-even rates, a measure of the price increases being discounted by the swaps market, rose to 2.95 percent on July 8, the highest since March.

Breakevens rose as the peso tumbled against the dollar and a frost pushed up the cost of fruit and vegetables. The statistics agency is also preparing to revise its methodology, a move that analysts expect to fuel price increases.

The head of the statistics agency resigned in April as the organization signaled it may have underestimated inflation.

Chile’s peso has weakened 7.2 percent against the dollar since May 6 on expectations that the U.S. Federal Reserve is preparing to wind down the asset purchases that have encouraged investors to look for higher returns in emerging markets.

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