March 14, 2013 / 2:40 PM / 5 years ago

Chile central bank expected to hold rates, seen in a bind

* Domestic demand, investment boosting economy
    * But global woes, strong peso seen hindering hike
    * Rates steady since a January 2012 cut to 5 pct
    * Central bank to announce decision at 2100 GMT

    SANTIAGO, March 14 (Reuters) - Chile's central bank is
expected to keep its benchmark lending rate on hold again on
Thursday, as buoyant growth and low inflation at home versus
persistent economic threats from abroad keep its hands tied. 
    The bank has kept the rate pat since a surprise
cut to 5 percent in January 2012, but its wait-and-see-stance
has become trickier in recent weeks.
    Initially feted for withstanding softer demand from top
trade partner China, world No.1 copper producer Chile is now at
risk of overheating on the back of ebullient domestic
consumption, according to some analysts. 
    Neither the central bank nor the government have used the
word 'overheating,' though the bank said last week that domestic
risks had become "more important" in the short-term.
    But with annual inflation well-below the central bank's 2
percent to 4 percent tolerance range and a robust peso 
currency, the bank isn't seen hiking rates in the near-term. 
    "While (overheated domestic demand) would ordinarily point
to rate hikes, we suspect that policymakers will want to avoid
pressuring the peso higher," Capital Economics said in a note to
clients. "With rate hikes off the table, the authorities may
consider macro-prudential measures to cool domestic demand in
the coming months."
    The bank unanimously chose to hold rates in February, and
reiterated it was within a range of neutral values. In standard
monetary policy parlance, a neutral interest rate neither spurs
nor curbs economic growth.
    Traders polled by the bank see the rate creeping up to 5.25
percent in 12 months, while analysts polled by the bank see it
at that level within 11 months.  

    Economic activity in Chile, which also exports wine, salmon,
fruit and wood products, totaled 5.6 percent growth last year,
defying forecasts. The economy is seen slowing to expand between
4.25 percent and 5.25 percent this year, according to the bank. 
    Inflation in the 12 months through February was 1.3 percent,
the lowest 12-month figure since at least January 2011.
    "We have highlighted lately that benign inflation prints and
appreciation pressures on the peso limit the scope for rate
hikes in 2013," Goldman Sachs said in a note to clients. 
    Chile's peso gained 8.48 percent last year, one of the
strongest performance by an emerging market currency, and has
strengthened roughly 1.63 percent so far this year. The peso's
performance has triggered calls from exporters for a central
bank intervention.
    Latin America has fretted over stimulus measures in the
developed world, which have caused an uptick in capital flows to
the region from investors seeking better returns and have
strengthened many local currencies.
     Mexico's peso, for instance, is scaling new highs amid
confidence in the country's reform push, a likely credit ratings
upgrade and profit taking after last week's interest rate cut,
sparking speculation about how far it will rise before
authorities act. 
    Chile's central bank is due to announce its rate decision on
Thursday at 6pm local time (2100 GMT).

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