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Chile Central Bank considers it too early to cut interest rates

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Central Bank of Chile said at its August 18 monetary policy meeting that it considers it too early to cut interest rates, and this despite growing concerns about global economic growth and Europe’s debt crisis.

At the Aug. 18 meeting, the central bank took its second consecutive pause in raising rates, holding the benchmark overnight rate, known locally as the TPM, at 5.25%, and eliminated its rate-tightening bias.

One central bank governor, according to the minutes, said it “was too early to think about lowering the TPM,” while another governor pointed out that “the TPM was in its comfort zone.”

A future interest rate cut isn’t far-fetched, however, as elsewhere in the region, Brazil’s central bank unexpectedly cut its benchmark interest rate this week, after five consecutive increases earlier this year.

The Chilean central bank’s governors unanimously voted to maintain interest rates steady and agreed that a global slowdown “would have an impact on Chile’s economy,” according to the minutes. Some governors argued that “emerging market economies might see their growth significantly hampered, which would further decay global growth.”

In Chile, recent data continued to highlight strong economic activity and a substantial reduction in private inflation expectations, but the uncertain external situation would probably lead to more moderate growth and further declining inflation, the minutes said.

For 2011, the central bank expects inflation to end the year at 4.0%, but this outlook will likely be downwardly revised on September 7 when it releases its quarterly Monetary Policy Report.

Most analysts foresee the Chilean central bank maintaining rates pat at 5.25% for the short-term and keeping its bias neutral, although they say a rate cut can’t be ruled out if the global economy’s health worsens quickly.

“The central bank established a clearly neutral bias going forward and is likely happy to remain on hold for the time being…altogether, we expect the central bank to take its time to fully assess global developments and not to rush into a cut, or to hike further, but to act flexibly,” said Goldman Sachs economist Alberto Ramos.

Santiago, September 2, 2011, (Dow Jones)