MercoPress. South Atlantic News Agency

Chile leaves benchmark rate unchanged, but warns about tight labor market

Central bank president Jose De Gregorio

Chile’s central bank kept its benchmark interest rate unchanged this week for the third straight month and indicated that a tight labor market may prevent it from following Brazil and cutting rates next month.

The five-member board, led by bank President Jose De Gregorio, held the overnight rate at 5.25%. Brazil’s central bank last month unexpectedly cut rates by a half point after five straight increases, citing a deterioration of the global economy.

The decision leaves Chile with the third-highest interest rate among Latin America’s major economies after Brazil and Argentina. The peso, which has weakened 1.5% in the past month, fell 0.2% to 479.17 per U.S. dollar.

“Labor market conditions are still tight and faster growth in nominal wages is observed,” the central bank said in the statement accompanying its decision.

Chile’s unemployment rate fell to 7.5% in the three months through July from 8.3% in the same period last year, while salaries grew 5.9% in July from last year, according to the country’s National Statistics Institute.

The bank will keep rates unchanged through December before cutting at least twice next year, according to the median estimate of 49 traders and investors in a central bank survey published on Sept. 15.

Policy makers in the statement accompanying the decision omitted language in communiqués published before August about the possibility for “additional increases” in borrowing costs, saying instead that “future changes in the monetary policy rate will depend on the implications of domestic and external macroeconomic conditions.”

The central bank on Sept. 7 in its Monetary Policy Report cut its global growth forecast to 3.9% for 2011 and 4% for next year from 4.1% and 4.5%, respectively, in estimates published in June.

“Activity indicators confirm a slower pace of growth in the United States and Europe,” the central bank said in the statement.

Policy makers also on Sept. 7 reduced the upper end of their 2011 growth forecast for Chile to 6.75% from 7% and forecast expansion of between 4.25% and 5.25% in 2012.

“The biggest impact of the change in the external scenario will be seen in 2012 growth” De Gregorio told Senators on Sept. 7 after publishing the new forecasts. “The external scenario also has brought about major modifications in the inflationary outlook, especially in the short term.”

Policy makers cut 2011 inflation estimates to 3.3% this month from 4% in their June report. Consumer prices rose 3.2% in August and 2.9% in July, according to government data. The central bank targets 3% inflation with a 1 percentage point margin of error over two years.

“Inflation expectations are close to the target” the bank said in its statement.