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Chile cbank seen holding rate later Thurs, may signal dovish shift
May 16, 2013 / 5:26 PM / 4 years ago

Chile cbank seen holding rate later Thurs, may signal dovish shift

* Rate has been held at 5 pct since Jan 2012 cut
    * Slower local growth, demand could lead to future cuts
    * Central bank has said key rate neutral for Chile

    By Alexandra Ulmer
    SANTIAGO, May 16 (Reuters) - Chile's central bank is
expected to hold its key interest rate steady later
on Thursday, but could strike a more dovish tone after data
showed the Andean country's buoyant economy slowing more quickly
than forecast.
    The rate has been held at 5.0 percent since a surprise cut
in January 2012. Robust local economic growth, low inflation and
ebullient domestic demand have countered external economic
threats and kept the bank's hands tied.
    That balance may have shifted slightly, analysts say. Prices
of top export copper have tumbled recently, arch economic growth
came in at its weakest in nearly two years and consumer prices
dropped sharply in April. 
    Both analysts and traders polled by the bank now see the
rate at 5 percent through a two-year horizon, a reversal from
previous bets on an increase in the medium-term. 
    Bank president Rodrigo Vergara has reiterated that while the
rate is high by international standards, it is neutral for
Chile. In monetary policy parlance, a neutral rate does not spur
or slow growth, all other factors being equal. 
    "While we expect the bias to remain neutral, which will
anticipate a rate hold in the short-term, we think (the bank's
post-meeting communique) will leave the door open to a potential
rate cut if the local slowdown deepens or expectations are
unmoored," Banchile Inversiones said in a note to clients. 
    The bank forecasts 4.5 percent to 5.5 percent economic
growth for world No.1 copper producer Chile in 2013, easing from
the 5.6 percent growth rate last year. Last week Vergara said
Chile's economic growth is slowing faster than expected, citing
signs of softer domestic demand. 

    This marks a turnabout from earlier in the year, when
Chile's economic growth was still thriving and domestic demand
was flagged as the most significant local risk to the economy.
    Firm local demand had fueled fears of overheating, but those
concerns seem to have been left behind amid signs of a slowdown,
leading some analysts to point to the possibility of a rate cut
as early as this year.
    "Further weakness in the incoming data on activity may open
a window of opportunity for the central bank to cut the policy
rate in order to better align domestic and global monetary
conditions, reducing appreciation pressures on the (peso
currency)," Goldman Sachs said in a note to clients. 
    "Hence, while we do not pencil in rate cuts in 2013 in our
baseline scenario, we see a distinct probability this may occur
during (the second half of 2013)," Goldman Sachs added. 
    The apparent economic easing has relieved pressure on
Chile's peso, whose strength is a major headache for
exporters in commodities-dependent Chile.
    The currency has retreated from the year-and-a-half high it
reached in April, when it was buoyed by Chile's robust economy,
an attractive rate differential and copper prices.
So-called quantitative easing measures in developed economies
have also helped fuel the peso's appreciation. 
    The peso was trading around 479 per U.S. dollar on Thursday,
far weaker than last month, when it breached 465.50 per dollar. 
    Elsewhere in the region's expanding economies, banks are
using an array of monetary policy strategies.
    Regional powerhouse Brazil's central bank last month raised
rates from a record low to tame inflation. 
    But in Latin America's No.2 economy, Mexico, the central
bank is not leaning toward another rate cut, governor Agustin
Carstens said earlier this month, adding the market had read too
much into some of his recent comments. 
    Neighbor Peru's central bank held its key rate steady at
4.25 percent for the 24th straight month last week, as inflation
runs within the target range and the economy expands near its
    Colombia's central bank last month held its rate steady,
pausing a five-month easing cycle on hopes lower borrowing costs
and a government stimulus package will spur faster growth.
    The Chilean central bank is scheduled to announce its rate
decision at 6pm local time (10pm GMT).

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