Chile Likely to Keep Key Rate on Hold as Consumers Boost Economy

Chile’s central bank board probably will keep its key interest rate unchanged for the 20th straight meeting today after consumer spending helped reverse a slowdown in economic growth.

Policy makers, led by bank President Rodrigo Vergara, will hold the benchmark rate at 5 percent, according to 15 of 19 economists surveyed by Bloomberg. The other four predict a quarter-point reduction after the central bank trimmed its gross domestic product growth forecast for this year. The decision is slated to be published after 6:00 p.m. local time.

Retail sales beat estimates in July, fueling the fastest economic growth in six months, according to central bank data. Signs the world’s biggest copper producer is rebounding after two straight quarters of slower growth led traders to pare bets Chile will follow Mexico’s lead and cut interest rates to stave off a deceleration.

“The scenario the central bank is waiting for to cut rates hasn’t happened,” Nathan Pincheira, senior economist at Banchile Inversiones in Santiago, said in a phone interview. “In fact, we have seen a re-acceleration.”

One-year swap rates have increased 16 basis points, or 0.16 percentage point, to 4.72 percent in the past 30 days as traders scrap bets the central bank will cut interest rates by a half-point this year. Traders are now forecasting a quarter-point cut by December.

In Peru, the world’s third biggest exporter of copper, analysts surveyed by Bloomberg also forecast the central bank will keep interest rates unchanged today at 4.25 percent.

Below Target

Chile’s central bank has the highest benchmark interest rate among major Latin American economies after Brazil, which has increased borrowing costs in its past four meetings to slow inflation that twice this year breached the upper limit of its target range. Chile’s 2.2 percent inflation rate in August was the lowest amid major economies in the region and shy of the central bank’s 3 percent target.

GDP growth eased to 4.5 percent in the first quarter and 4.1 percent in the second after climbing 5.6 percent in 2012 from the previous year. The economy as measured by the central bank’s Imacec index, which is a proxy for GDP, climbed 5.3 percent in July, the fastest expansion since January.

Retail sales in July surged 10.3 percent, beating the 9.2 percent median estimate in a Bloomberg survey of 11 analysts. Manufacturing expanded 4.7 percent following two straight months of declines, and unemployment in the three months through July fell to 5.7 percent from 6.5 percent a year before.

Higher demand didn’t prevent policy makers last week from reducing their 2013 growth estimate to a range of 4 percent to 4.5 percent from 4 percent to 5 percent. They raised domestic consumption forecasts to 5.6 percent from 5 percent while cutting the global growth outlook.

“Consumer spending is not easing because the labor market is still tight and there are expectations this momentum will continue,” said Alejandro Alarcon, an economist at the University of Chile in Santiago.