Chile Keeps Key Rate on Hold as Inflation Exceeds Forecasts

Chile´s central bank kept borrowing costs unchanged for a fifth straight month after bank President Rodrigo Vergara said inflation would take longer than forecast to slow to target.

Policy makers left the benchmark interest rate at 3 percent Thursday, as forecast by all 21 economists surveyed by Bloomberg.

The central bank has paused after cutting rates eight times in the 12 months through October as inflation exceeded the target range for 11 consecutive months. With annual inflation above analyst forecasts in five of the past seven months as the peso falls against the dollar, Vergara said last week that the bank doesn’t see room for more cuts in the “foreseeable future.”

“The table is served for the bank to hold rates for a long time,” said Felipe Alarcon, chief economist at EuroAmerica SA in Santiago. “There’s no space either for rate cuts or hikes. The bank highlights again its concern about continued inflationary pressures.”

Consumer prices rose 4.4 percent in February from the year earlier, compared with the bank’s 2 percent to 4 percent target range. Core inflation, which excludes fuel and produce, has accelerated for 20 of the last 21 months, reaching 5.7 percent in February.

“Underlying inflation remains high,” the central bank said in a statement accompanying Thursday’s decision. “In the most likely scenario, annual inflation will remain above the top limit of the target range for some months, a development which will require monitoring with particular attention.”

‘Incipient’ Recovery

Vergara had said in December that inflation would “rapidly return” to the mid-point of the target range by the end of the second quarter or in the third quarter. Since then, inflation has remained higher than forecast as an 11 percent decline in the peso over the past year pushes up import costs.

“Greater inflationary pressures have been the main obstacle to the central bank lowering rates,” said Andres Osorio, an economist at IM Trust-Credicorp Capital in Santiago. “We expect the bank to keep rates on hold at 3 percent during the rest of the year.”

While inflation remains above target, Chile’s economy rebounded in the fourth quarter, expanding at the fastest pace in five quarters, the central bank said on its website Wednesday.

Gross domestic product grew 0.9 percent from the previous three months, when it gained 0.4 percent. Over all of last year, GDP rose 1.9 percent, compared with 4.2 percent in 2013.

Stay Prudent

Vergara told analysts on March 10 to remain “prudent” over prospects of faster growth in Chile. Two days later, he said Chile is seeing an “incipient” recovery, in line with central bank forecasts. Domestic demand remains weak though, he added.

Investment rose 0.5 percent in the fourth quarter from the year earlier, the first increase since the second quarter of 2013. Investment had slumped 12.1 percent in the previous three months.

Policy makers reduced their growth forecast for this year in December to 2.5 percent to 3.5 percent, from a previous estimate of 3 percent to 4 percent. A new quarterly monetary policy report will be published on March 30.

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