Vergara Says Data Paving the Way for Further Chile Rate Cuts

Chile’s central bank President Rodrigo Vergara said slower than expected economic growth and a lack of inflationary pressures are paving the way for further interest rate cuts.

“There is a probability that we have an expansive monetary policy going forward,” Vergara said in an interview at his office in Santiago today. “We don’t think it will be massive, that a huge monetary stimulus is needed, but there is a probability that an additional monetary push will be required.”

Inflation, which reached the central bank’s 3 percent target in December, will remain under control as the economy continues to expand below potential this year, Vergara said. Faster inflation in the past two months is transitory, with little sign of wage pressures or international energy and food costs pushing price-increases toward the top of the target range in the foreseeable future, Vergara said.

Two-year interest rate swap contracts in pesos fell for a seventh day today to 4.05 percent, the lowest since October 2011, implying the key rate will drop to 3.75 percent within nine months from the current 4.5 percent, according to Banco de Chile. The yield on 10-year peso bonds fell to 5.03 percent today from 5.21 percent on Jan. 3.

Policy makers left the key rate unchanged on Jan. 16, following reductions in October and November, while signaling that they may resume rate cuts.

Slower Growth

“How much and when, we will have to evaluate as we get updated” information,’’ Vergara said today.

The Imacec, a proxy for gross domestic product, expanded 2.8 percent in both November and October, the second slowest pace since an earthquake devastated the central south of the country in March 2010. Mining and retail sales have led growth, while manufacturing contracted in six of the seven months through November.

“We were expecting a deceleration for a long time,” Vergara said. “It has arrived with a bit more intensity than we anticipated.”

Vergara said the economy grew about 4 percent last year, “somewhat” less than the 4.2 percent initially forecast. He reiterated the bank’s estimate for expansion this year of 3.75 percent to 4.75 percent.

Weaker Peso

As growth has slowed, the inflation rate increased, rising to 3 percent in December from 2.4 percent in November and 1.5 percent in October. The bank targets inflation of 3 percent, plus or minus one percentage point.

The pick-up in inflation “is basically related to the depreciation of the peso,” Vergara said. The increase shouldn’t translate into permanently faster inflation and policy markers “are relatively unconcerned” about price gains, he said

The peso has weakened 8.1 percent against the dollar in the past three months, more than any other major Latin American currency apart from Argentina, as the central bank reduces rates.

“The Chilean economy has continued to lose strength,” the central bank said when it left rates on hold last week. “The board estimates that in the coming months it might be necessary to increase the monetary stimulus to ensure that projected inflation will stand at 3 percent in the policy horizon.”

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