Chile Holds Key Rate as Outlook for Growth and Inflation Worsens

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Chile’s central bank kept borrowing costs unchanged for a ninth month, highlighting weaker-than-expected growth after an economic recovery proved short-lived.

Policy makers, led by bank President Rodrigo Vergara, left the benchmark interest rate at 3 percent Tuesday, as forecast by all 26 economists surveyed by Bloomberg.

Finance Minister Rodrigo Valdes said on July 6 that the economy would grow less than forecast this year, prices would rise more than forecast and the budget deficit would be wider than forecast. The bank echoed that sentiment in a statement accompanying Tuesday’s decision, while reducing the number of lines dedicated to inflation and adding a section on weaker economic activity and demand.

“The central bank continues to have a neutral bias, but in this statement they make it clear that they are putting the emphasis on economic growth,” said Mario Castro, a strategist at Nomura Securities in New York. “They will continue to kick the can down the road in terms of the start of the tightening cycle.”

The Imacec index, a proxy for gross domestic product, rose 0.8 percent in May from a year earlier, the second-slowest pace in five years and less than forecast by all 21 economists surveyed by Bloomberg.

The jobless rate also rose more than analysts expected in May, reaching the highest level in eight months, while manufacturing production declined for the third month in four.

“Activity and demand have been weaker than forecast,” the central bank said in a statement accompanying Tuesday’s decision. Moreover, “private expectations for growth have declined for this year and next.”

Picking Up

The government reported last week that prices rose 0.5 percent in June, more than predicted by any of the 21 analysts surveyed by Bloomberg.

The jump pushed the annual inflation rate up for the first time in eight months, leaving it at 4.4 percent. The central bank targets inflation of 2 percent to 4 percent.

“The best strategy for the central bank at this point seems to be stay put,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA. “If on the one hand economic activity has disappointed lately, on the other hand inflation has continued to surprise on the upside.”

Valdes last week raised the inflation forecast for the year to 3.5 percent, compared with the 2.8 percent predicted in the 2015 budget. At the same time, he cut the government’s growth forecast to 2.5 percent for this year from the 3.6 percent estimated in the 2015 budget.

“The economy is adapting to new external conditions,” Valdes said. “Investment continues to be weak.”

On June 3, the central bank cut its GDP estimate to 2.25 percent to 3.25 percent, down from the 2.5 percent to 3.5 percent estimated in March and from 4 to 5 percent in September 2013.