Chile Keeps 4% Rate After Four Rate Reductions in Six Months

Chile kept borrowing costs unchanged as quickening inflation led the central bank to pause following four reductions in the past six months.

Policy makers, led by bank President Rodrigo Vergara, held the key rate at 4 percent yesterday, as forecast by 15 of 19 economists surveyed by Bloomberg. Four predicted a quarter-point cut.

“The bank is seeing an economy that’s going from less to more and that dynamism will pick-up significantly by year-end and inflation expectations are perfectly well anchored at 3 percent,” Alberto Naudon, chief economist at Banco de Credito e Inversiones, said in a telephone interview. “It isn´t necessary to stimulate the economy more than is already priced in the price of assets, and that is one cut in the next couple of months.”

The central bank toned down the outlook for further cuts at its last meeting March 13 as inflation rose above the mid-point of the target range, while repeating that it expected the pick-up to be temporary. Since then, inflation has accelerated further, reaching 3.5 percent in March from 3.2 percent in February, fueled by the peso’s slump to a near five-year low against the dollar last month.

The peso closed at 557.26 to the dollar yesterday, down 11 percent since Oct. 17, when the central bank unexpectedly cut the key rate for the first time in 21 months.

‘Inflationary Pressures’

Policy makers raised their inflation estimate for this year to 3 percent from 2.5 percent in their quarterly monetary policy report last month. The bank also said its base scenario sees the inflation rate rising temporarily to between 3.5 percent and 4 percent, before returning to about 3 percent by year end, where it will remain during 2015.

“There are still inflationary pressures that could eventually show through and put inflation expectations at risk,” Guillermo Le Fort, an economist at Universidad de Chile in Santiago, told reporters April 16.

For the moment, inflation expectations for this year remain within policy makers’ 2 percent to 4 percent target range, according to a survey released by the central bank April 10.

“The minutes and easing bias from the previous meeting suggest that even if they recognize the need for more cuts, they are not in a rush,” Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut, said by phone before yesterday’s decision.

Rate Horizion

The bank will cut the key rate to 3.5 percent within 12 months as economic growth slows, according to a central bank survey of traders and investors published April 9.

“The Board will consider the possibility of making additional cuts to the policy rate in line with the evolution of domestic and external macroeconomic conditions and its implications on the inflationary outlook,” the board said in their statement posted on the central bank’s website. “At the same time, the Board reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3 percent over the policy horizon.”

The Imacec Index, a proxy for gross domestic product, rose 1.6 percent in January, the slowest pace in four years, before picking up to 2.9 percent in February.

Manufacturing output has declined on an annual basis in five of the past six months, while investment in the South American nation tumbled 12.3 percent in the fourth quarter from the year earlier.

“An important part of the deceleration in the economy in the last few quarters is due to the drop in investment,” Vergara said March 31. “The base scenario estimates that this phenomenon won´t worsen, and that in respect to some components, it will reverse.”

-with assistance from Ainhoa Goyeneche in Washington.

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