Chile Bank Keeps Rate at 8.25% on Financial Crisis

By Sebastian Boyd

Oct. 9 (Bloomberg) -- Chile's central bank kept its benchmark interest rate unchanged today as concern that a global credit crisis might damage the country's economy outweighed the threat from consumer price inflation.

The central bank, led by bank President Jose De Gregorio, voted to keep the overnight lending rate at 8.25 percent, in line with the projections of 17 of 26 economists surveyed by Bloomberg. Nine economists expected a quarter-point increase.

Chilean economists have lowered their expectations for the country's economic growth next year, suggesting the global credit crisis may help restrain consumer prices. Financial conditions in Chile have tightened and medium-term inflation expectations have fallen, the bank said in a statement announcing its decision.

``In its future decisions, the council will weigh the implications derived from unfolding financial developments on expected inflation,'' the statement said. Chile's underlying inflation remains high, internal demand is still growing fast and unemployment remains stable, it said.

``They're concerned about the impact of the financial crisis on the economy,'' said Pedro Tuesta, senior Latin American economist at 4Cast Inc. in Washington. ``What the bank is betting is that the impact of the financial crisis on economic activity is such that it reduces inflationary pressure.''

The central bank last month increased its benchmark rate to a decade high of 8.25 percent, and has raised rates by 6.5 percentage points in the past four years and 2.25 percentage points this year. At the time of the bank's last meeting, many analysts expected policy makers would raise rates again this month to fight annual inflation running three times faster than bank's target of 3 percent.

Annual Inflation

Chile's 9.2 percent annual inflation rate in September was more than three times that of two years earlier, after demand for commodities surged. Oil, grains and copper, Chile's top export, have since slumped on concern that a credit freeze and a global economic slowdown will slash demand.

Policy makers are committed to ensuring the best possible outlook for the Chilean economy amid ``uncertainty and turbulence that is unprecedented in the last decades,'' bank President De Gregorio told Chile's Senate yesterday.

The bank has a ``flexible'' monetary policy and would tailor it to fit the economic climate, he added.

``The most likely thing is that forecasts for world growth are adjusted downward significantly,'' De Gregorio said. That ``would contribute to reducing inflation pressures in the medium term.''

IMF Outlook

Chile's inflation will end the year at 8.9 percent, the International Monetary Fund said yesterday, the third-fastest of eight South American countries in the IMF forecast, slowing to 6.5 percent next year.

Prices in Argentina and Venezuela will rise faster this year. The IMF cut its forecast for Chile's economic growth next year to 3.8 percent from a 4.6 percent forecast in July.

Economists cut their 2009 economic growth forecast to 3.5 percent, down from the 4.2 percent they expected in September, according to a monthly central bank survey published yesterday.

Banco Santander cut its 2009 growth forecast to 3.3 percent and UBS AG yesterday said it expected 3.2 percent growth.

``There has been a change in scenario,'' said Rodrigo Aravena, an economist at Banchile Inversiones in Santiago. ``An interest rate above 8 percent is already high and the rest of the world is helping with less demand and slowing inflation.''

Interbank lending costs in Chile have soared after foreign lenders reduced access to dollar financing. The central bank has offered $1 billion in currency swaps, of which $410 million were accepted, and it will offer a further $1 billion over the next two weeks.

Finance Minister Andres Velasco this week said he transferred $1.05 billion in deposits to Chilean banks last week after short-term rates in Chile rose.

Velasco yesterday said he would ask the central bank to set up a system for auctioning future dollar deposits as they come available from government revenue.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net