February 14, 2013 / 3:15 PM / in 5 years

Chile's central bank seen holding interest rate later Thursday

By Anthony Esposito
    SANTIAGO, Feb 14 (Reuters) - Chile's central bank is
expected to keep its benchmark lending rate on hold again on
Thursday as it weighs low inflation and a strong currency
against the impact of brisk economic growth and firm domestic
    The No.1 global copper producer's small, export-dependent
economy has largely weathered the effects of slowing demand in
top trade partner China, a sluggish recovery in the United
States, and the euro zone's unrelenting crisis.
    Buoyant domestic demand, the lowest unemployment rate in six
years and sizeable investments fueled 5.6 percent growth last
    Inflation, a mainstay of central bank preoccupation, has
remained well below the bank's target range of 2.0 percent to
4.0 percent. It was 1.6 percent in the 12 months to January.
    That has prompted the bank to keep the key rate 
steady at 5.0 percent, a level considered neutral for Chile's
economy, since a surprise cut in January 2012. In standard
monetary policy parlance, a neutral interest rate neither spurs
or curbs economic growth, all other factors being equal.
    Analysts and traders surveyed in two separate central bank
polls said they saw the key rate remaining at its current level
in coming months, with many seeing no change throughout the
    "They're going to stay on hold for a good three to six
months, perhaps the rest of the year. It depends on how local
economic indicators evolve," said Michael Henderson, an
economist with Capital Economics in London.

    By contrast in the region, Brazil's inflation accelerated to
the fastest rate in nearly eight years in January, raising bets
of an interest rate hike this year that could complicate the
government's drive to reignite a near-stagnant economy.
    An official at Peru's central bank said earlier this month
that if annual inflation cools to 2 percent as expected in the
coming months, "the conditions would be created" for lowering
the interest rate, which the bank has held steady for 21
straight months. 
    Mexico's central bank chief Agustin Carstens warned on
Wednesday that lower interest rates are not a "done deal" for
Latin America's second-largest economy despite his forecasts of
tame inflation over the next two years. 
    When Chile's central bank releases its post-meeting
statement at 6 p.m. local time (2100 GMT), market participants
will scour it for any indication of concern about the local
peso's strength.
    Chile's peso, boosted by robust economic growth and healthy
prices for top export copper, was one of the strongest
foreign currency performers against the U.S. dollar among 152
currencies tracked by Reuters last year. It has firmed over 10
percent versus the greenback since the start of 2012.
    Latin American authorities have expressed worry that
stimulus measures in the developed world will trigger more
capital flows into the commodities-dependent region, further
strengthening local currencies.  
    Chilean Finance Minister Felipe Larrain said last month that
the government would support any intervention by the country's
independent central bank to weaken the strong peso.
    The central bank deployed a dollar-purchasing program in
2011 to curb peso strength after it appreciated to its highest
level in more than 2-1/2 years at 465.50 per dollar. It
currently stands at around 470.50.
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