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Chile Expected to Cut Interest Rate, Peru to Stand Firm

Chile Expected to Cut Interest Rate, Peru to Stand Firm

Posted by Juan Gavasa on May 07, 2014

Central bank watchers expect Chile's central bank to drop its monetary policy interest rate next week if inflation remains under control, while the consensus in neighboring Peru is for no change in the policy rate.

Chile's central bank eased its policy rate by 25 basis points in both February and March to where it now stands, at 4.0%. The decision in April to keep the rate unchanged was unanimous, the central bank said Tuesday in releasing minutes of its last meeting.

Peru's central bank has left its policy rate unchanged so far this year at 4.0%, and economists expect no change this Thursday when the board of directors hold their regular monthly meeting in Lima.

"We expect the benchmark interest rate to remain stable in May at 4%," said Scotiabank's chief of economic studies in Peru, Mario Guerrero. "The path of inflation remains above the target range and we have the view that the convergence towards the midpoint of the target range may take more time, which reduces the space for rate movements," he added.

Chile and Peru are suffering from inflation that is higher than central bank target ranges, due in part to seasonal factors. Economists forecast that consumer prices will decline during the year in both nations. Peru aims to keep annual inflation in a range of 1.0% to 3.0%, while Chile's central bank target is 3.0% on a two-year horizon, with inflation for the most part remaining between 2.0% and 4.0%.

A deprecation of the peso and higher international prices for energy and food pushed up Chile's consumer-price index to 3.5% in the 12-month period through the end of March.

BofA Merrill Lynch Global Research says Chile's CPI is expected to rise even higher, saying a statistical effect will cause an increase to about 4.1% to 4.2% year-over-year through April. It added that inflation will fall back closer to the center of the target band at the end of the year, and said it expects one more rate cut this year, in May. "Given that weak economic growth will deliver lower inflationary pressures, the central bank could lower its benchmark rate," said Credicorp Capital economist Andres Osorio.

Mr. Osorio said Chile's inflation data for April, to be released Thursday, will be important in determining the evolution of inflation and its implications for the medium-term outlook.

In its most recent board meeting minutes, various Chilean central bank members stressed the need to keep the door open for more policy rate cuts, although cautiously, and taking into account macroeconomic conditions.

One important factor is the slowing of Chile's economic growth. Its monthly gross domestic product proxy rose by a less-than-consensus 2.8% year-over-year in March, and declined 0.2% on a nonseasonally adjusted basis from the previous month. The central bank recently lowered its forecast for full-year GDP growth to between 3.0% and 4.0% from a previous forecast of growth of between 3.75% and 4.75%.

In Peru, the benchmark consumer-price index rose 3.52% in the 12-month period through April, although much of that gain was due to food and beverage prices.

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