Chile Central Bank Signals Possible Rate Cuts Before Year-End

Chilean central bank President Rodrigo Vergara said policy makers don’t have to wait for a slowdown in consumer spending before cutting rates, a day after a report showed retail sales soaring.

Weaker real wage growth and a decline in consumer optimism indicate that demand will ease in coming months, allowing a possible reduction in borrowing costs, Vergara said at an event in Santiago today. Policy makers have kept the key rate at 5 percent for 20 consecutive months as they wait for a consumer spending boom to ease.

“If we have evidence of a relatively strong slowdown in coming months, we could take monetary policy decisions even if the current information isn’t showing the symptoms,” Vergara said. The debate on consumer demand shouldn’t dominate rate decisions, he said.

The comments came a day after the National Statistics Institute said retail sales leaped 12 percent in August from the year earlier, bringing year-to-date growth to 10.2 percent. It was the fifth time in the past six months that sales growth beat the median forecast of analysts surveyed by Bloomberg.

“What is relevant for our policy decisions is how we see the future, not what we have seen in the past,” Vergara said.

Two-year Chilean swap rates fell 2 basis points to 4.74 percent today, after climbing 3 basis points Sept. 30 when the retail sales report was released. Swap rates are an indication of expectations for the average future interest rate.

Weaker internal demand, led by a slowdown in investment in the mining industry, may provide a “positive surprise” for the current account deficit, which is forecast to end the year at about 4 percent of gross domestic product, Vergara said.

“The current account deficit could be inferior to our forecast, but we still need more information in order to modify it,” he said.

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