May 16, 2013 / 10:56 PM / 5 years ago

UPDATE 1-Chile central bank holds key rate, sees weak growth, peso

* Bank underlines slower demand, growth in 1st quarter
    * Exchange rate has weakened
    * Rate has been held at 5 pct since January 2012 cut

    SANTIAGO, May 16 (Reuters) - Chile's central bank held its
key interest rate steady on Thursday as expected, flagging
softer economic growth and a weaker peso. 
    The rate has been 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 to keep the bank's hands tied.
    That balance might have shifted slightly in recent months,
analysts say. Prices of top export copper have tumbled, March
economic growth was the weakest in nearly two years and consumer
prices dropped sharply in April. 
    "Domestically, first-quarter indicators show decelerating
output and demand," the bank said. "The labor market is still
tight. Headline and core inflation measures remain close to 1%
y-o-y, while surveys suggest that inflationary expectations over
the policy horizon remain around the target."      
    Matias Madrid, chief economist with Banco Penta in Santiago,
said the central bank was saying inflation expectations were
close to its target.
    "Had they diverged, it would have been a pretext for a
potential cut, but this hasn't happened, so there's no change in
the bias," he said. 
    Bank president Rodrigo Vergara has repeated 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. 
    "There's uncertainty about whether there could be a cut in
the second half of the year, but for the moment we continue to
see a rate hold in the short-term," Madrid added.
    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. 
    The bank forecast 4.5 percent to 5.5 percent economic growth
for world No.1 copper producer Chile in 2013, easing from the
5.6 percent 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.
    The apparent economic easing has relieved pressure on
Chile's peso, whose strength is a major headache for
exporters in commodities-dependent Chile.
    "The exchange rate has depreciated; however, in real terms
it is still in the lower part of the range that is compatible
with its long-term fundamentals," the bank added on Thursday.
    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 slipped to its weakest level against the U.S.
dollar this year on Thursday, closing at 480.00 per dollar, a
sharp reversal from the year-and-a-half highs it hit in April.
    Elsewhere in the region's expanding economies, banks are
using an array of monetary policy strategies.
    Regional powerhouse Brazil's central bank raised rates last
month 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 that the market had
read too much into some of his recent comments. 
    Neighboring Peru's central bank held its key rate steady at
4.25 percent for the 24th straight month last week, as inflation
stayed within the target range and the economy expanded 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 would spur faster growth.

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