Chile Keeps Key Rate at 3.5% as Weak Economy Damps Inflation

  • Benchmark rate unchanged for the seventh consecutive month
  • Inflation seen falling within target range in third quarter

Chile’s central bank left its benchmark interest rate unchanged for the seventh consecutive month as a weak economy gradually drags inflation back toward the target range.

Policy makers, led by central bank President Rodrigo Vergara, kept the key rate at 3.5 percent on Thursday, as forecast by all 19 analysts surveyed by Bloomberg.

While the 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. 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.

Policy makers "might be thinking that the Fed could raise rates and cause some disruption in the exchange rate that could take inflation up again," said Euroamerica economist Felipe Alarcon. "They are covering their backs from all sides."

Economists have reduced their expectations for rate increases as the outlook for economic expansion deteriorates and inflation edges lower. The Finance Ministry cut its 2016 growth forecast this week to 1.7 percent from 2 percent, a month after the central bank reduced the top end of its prediction to 2 percent from 2.25 percent. A third year of subdued growth has eased pressure on inflation, which has been stuck at 4.2 percent for three months.

“Annual inflation has descended gradually and is expected to return to the target range in the third quarter,” the central bank’s research department said in a report Wednesday.

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.

The jobless rate climbed more than expected to 6.8 percent from 6.4 percent in the month earlier period and from 6.6 percent the year before. Industrial production slid 2 percent over the same period, while retail sales edged up 0.6 percent, the slowest pace since March of last year.

“Second-quarter output and demand data confirm limited growth,” the central bank said in today’s statement. “Confidence indicators are still in pessimistic territory. The labor market continues to reflect a deterioration in comparison to early in the year.”

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