Chile and Peru Keep Rates on Hold as CPI Edges Closer to Target

  • Weak growth is a bigger concern for policy makers in Chile
  • Inflation has slowed for five consecutive months in Peru

Policy makers in Chile and Peru kept borrowing costs unchanged as inflation converges toward target, allowing the central banks to continue supporting growth.

Chile’s central bank left its benchmark interest rate at 3.5 percent for a seventh consecutive month on Thursday while Peru’s central bank held its key rate at 4.25 percent for a fifth straight month. The decisions matched the forecasts of economists surveyed by Bloomberg.

The two Andean countries are benefiting from slowing inflation as their currencies appreciate and inflation expectations are anchored within the target band in Chile and slowing in Peru. While the slide in copper revenue has hurt investment in both countries, the pace of economic growth is a bigger concern for policy makers in Chile, said Ezequiel Aguirre, a strategist at Bank of America Merrill Lynch.

“Chile’s economy is definitely growing below potential and below what the central bank would like to see,” Aguirre said by phone from New York. “Peru’s inflation is coming down in a more persistent way than in Chile so although growth has been picking up, there’s no immediate reason to hike.”

Scant Price Pressure

While Chile’s central bank maintained its tightening bias, saying that borrowing costs may need to rise to ensure inflation slows in line with the 2 percent to 4 percent target range, economists have scaled back their forecasts for rate increases as inflation edges lower.

Analysts and traders don’t expect another rate hike until the second half of 2017 or 2018, with some seeing only one increase and not the two previously estimated, according to central bank surveys.

Chile’s unemployment rate rose to the highest in almost five years in the three months through May, as industrial production stalled and retail sales growth eased, pressuring inflation lower.

Peru’s central bank kept borrowing costs unchanged after the annual inflation rate slowed to 3.34 percent in June, falling from a four-year high in January.

In a statement accompanying the decision, the central bank said it expects inflation will be within its target range of 1 percent to 3 percent before year-end.

Peru’s economy expanded in April at the slowest pace in almost a year even as copper production surged, and lending growth hit a six-year low in May.

Inflation is likely to pick up toward year end as President-elect Pedro Pablo Kuczynski loosens fiscal policy, bolstering economic growth, said Adam Collins, an analyst at Capital Economics Ltd.

Before it's here, it's on the Bloomberg Terminal.