(Bloomberg) -- Chile held its benchmark interest rate steady after the biggest protests in decades sent the currency to a record low, reviving inflation concerns even as the economy contracts.
The bank board, led by Mario Marcel, on Wednesday voted unanimously to keep borrowing costs at 1.75%, as expected by eight of the 18 economists in a Bloomberg survey. The other 10 forecast the central bank would cut rates by a quarter-point. Swap traders were pricing in less than a 50% chance of a rate cut.
Chile’s economy is reeling from more than six weeks of social revolt and rioting, sparked initially by a metro fare increase. The protests sunk the peso to a record low, prompting the central bank to promise as much as $20 billion in spot and swap operations to prop up the currency. An uptick in inflation expectations, as well as views that monetary policy is already expansive, prompted the central bank to hold rates even as activity suffers.
“It’s the right decision,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs Group Inc (NYSE:GS). in New York. “There is still intense depreciation pressure on the currency. This is not the time for a cut.”
Today’s rate decision was brought forward from Dec. 6, with policy makers saying they wanted to provide more “timely information” about the country’s economic situation following weeks of unrest.
Inflation Calls
Widespread discontent about the country’s social safety net have driven protests during which more than 20 people died and thousands were injured, including more than 2,000 police officers. President Sebastian Pinera at first responded by declaring a state of emergency and calling in troops, before quickly backtracking.
Since then, the government has launched a series of measures including proposals aimed at boosting pensions and salaries for the poorest, as well as billions of dollars in fiscal stimulus to create jobs.
A 12.3% decline in the peso year-to-date has pushed up consumer price expectations, as did the series of announcements on new spending. A central bank survey of traders and investors published this month showed that the median expectation for inflation next year is 3%, up from 2.7% in October.
Marcel Comments
Hawkish comments from Marcel also fueled expectations the bank would hold. On Friday, he said monetary policy was already “significantly expansive” and that it should be consistent with exchange-rate policy and take into account changes in fiscal policy.
Consumer prices rose 2.5% in the 12 months through October. The central bank targets annual inflation of 3%.
Meanwhile, economic activity plummeted 5.4% in October from the month before, the biggest monthly decline since at least 1996. Retail sales in the same month slumped 12.1% year-on-year.
Despite the hit on growth, “cutting at this stage wouldn’t have made much sense,” said Rafael de la Fuente, chief economist for Latin America at UBS Group AG. “You’re not going to get much of a lift from easier financial conditions and you put additional pressure on the currency.”