Chile Holds Rates as Protests Portend Months of Uncertainty

John Quigley
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Chile Holds Rates as Protests Portend Months of Uncertainty

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Chile kept its benchmark interest rate unchanged as the worst social unrest in decades clouds the outlook for economic growth and saps demand for the peso.

The bank board, led by Mario Marcel, voted unanimously to keep borrowing costs steady at 1.75% Wednesday, as forecast by all 24 analysts surveyed by Bloomberg.

Since October, Chile has been in the grips of a social revolt that’s pushed the economy to the brink of recession. In a statement accompanying today’s decision, policy makers said the impact of the street protests on the economy eased in December, but that the outlook for growth remains weak. While inflation in December was lower that expected by the central bank, the recent declines in the peso remain a threat to consumer prices.

“The inherent pressures from the idiosyncratic depreciation that the peso has accumulated since October remain in force,” policy makers said. On the other hand “the outlook for economic activity is still weak.”

Chile’s unrest erupted initially over an increase in metro fares before ballooning into a broader social movement demanding better healthcare, pensions and education. The prolonged upheaval has left over 20 people dead, hurt consumer demand and investment, and probably led the economy to contract in the fourth quarter.

“Cutting rates could undermine their efforts to stabilize the currency,” said Alvaro Vivanco, a strategist at Natwest Markets in Stamford, Connecticut. “Right now, maintaining the peso stable is a big priority.”

President Sebastian Pinera has responded to the riots with a series of measures to boost pensions and salaries for the poorest, as well as billions of dollars in fiscal stimulus. Meanwhile, Marcel said last month monetary policy was already “significantly expansive” and that it should be consistent with exchange-rate policy.

Read More: Latin America’s Most Disliked President Kicks Off Pension Reform

The turmoil sent the peso to a record low in November and the currency remains weak even after the central bank promised as much as $20 billion in spot and swap operations to prop it up. The peso so far in January has dropped about 4.7% against the dollar, raising the threat of faster inflation in the second half of the year should the slide continue, said Antonio Moncado, an economist at Banco de Credito E Inversiones.

Furthermore, the outcome of April’s referendum on redrafting the pro-business constitution may have implications for both growth and inflation dynamics, said Moncado.

“It’s hard to argue for any change in the monetary policy stance before April,” he said.

(Updates with central bank comments starting in the third paragraph.)

--With assistance from Sebastian Boyd and Philip Sanders.

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, Robert Jameson, Matthew Malinowski

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