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Chile and Peru Keep Rates at 4% Amid Above-Target Inflation

Chile and Peru Keep Rates at 4% Amid Above-Target Inflation

Posted by Shanelle Weir on June 13, 2014

Chile and Peru kept interest rates unchanged yesterday as the central banks in both countries contend with above-target inflation and slowing economic growth.

Chilean policy makers, led by bank President Rodrigo Vergara, held the benchmark rate at 4 percent, as forecast by 16 of 17 economists surveyed by Bloomberg. One analyst predicted a quarter-point cut. Peru’s policy makers, led by bank President Julio Velarde also kept rates steady at 4 percent, as forecast by all 12 economists surveyed by Bloomberg.

Chile grew at the slowest pace in four years in the first quarter while Peru grew at the second-slowest pace, as falling copper prices halted an investment boom in the mining industry. The weaker growth didn’t prevent inflation accelerating for each of the past seven months in Chile and for the four of the past five months in Peru. Chile last cut rates in March, while Peru last did it in November.

If Chile’s inflation this month “is between 0.1 percent and 0.2 percent, there would be a green light to resume rate cuts,” said Felipe Alarcon, chief economist at EuroAmerica in Santiago. “If it is above expectations again, there will be new postponements.” Peruvian policy makers said the current rate “is compatible with a projected convergence of inflation to the target range in 2014 and 2 percent in 2015.”

Inflation in Chile accelerated to 4.7 percent in May, exceeding analyst forecasts for the fourth consecutive month and the 2 percent and 4 percent target range for a second month.

Likely Scenario 

The country’s economic slowdown should push up unemployment in the next few quarters, easing price pressure and helping inflation return to target range by year end, Vergara said June 4.

Inflation has accelerated from 1.5 percent in October of last year as a weaker peso pushes up import costs. The peso has declined 10.2 percent against the dollar in the past eight months, the worst performing major emerging market currency tracked by Bloomberg after the Argentine peso.

“The most likely scenario assumes that the rise in inflation — associated with the peso depreciation, among other factors — is a temporary development, which will be monitored with special attention,” policy makers said. “The Board will consider the possibility of making additional cuts.”

In the minutes of last month´s meeting some bankers highlighted that there may be more structural factors involved in the pick-up in inflation.

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