Chile Central Bank To Cut Rates Only 25BPs More In 2012

Chile Central Bank To Cut Rates Only 25BPs More In 2012 - BBVA

Chile's central bank will cut the benchmark overnight rate only by another 25 basis points this year as inflationary pressures will only abate in the fourth quarter, Banco Bilbao Vizcaya Argentaria Chile SA (BBVACL.SN) chief economist Alejandro Puente said Tuesday.

After holding its benchmark rate at 5.25% for about half of 2011, in January the Central Bank of Chile cut the rate by 25 basis points to 5%. It was the bank's first rate reduction since 2009.

"It doesn't currently make much sense to consider expansive monetary policy," Puente told reporters, noting that he expects the benchmark rate to end 2012 at 4.75% and hold there through mid-2013.

BBVA Chile, the local unit of Banco Bilbao Vizcaya Argentaria SA (BBVA, BBVA.MC), sees inflation ending 2012 at 3.1%, in line with the central bank's 3% target, but the retreat from current levels at 4.3% will be slow and will be concentrated in the final three months of the year, he added.

For the consumer price index to retreat, however, domestic demand must begin to lose steam in coming months.

Analysts had projected demand would decelerate in December but retail sales--considered a strong measure of demand--unexpectedly surged 10% on the year.

BBVA sees growth in private consumption slowing down to 4.5% this year, versus a 9% year-on-year increase in 2011.

In addition to inflationary pressures fueled by high imported fuel prices and resilient domestic demand, a tight labor market--which has resulted in increased salaries--has also given the central bank less room to reduce rates, Puente said.

BBVA's outlook of only one more quarter-of-a-percentage-point cut differs from the views of other analysts, who see the benchmark rate ending 2012 in a range of 4% to 4.5%.

Gross domestic product, the bank said, will likely grow 4% on the year in 2012, down from an expected gain of 6.3% in 2011. The central bank will release full-year 2011 GDP data in March. In the January-September 2011 period, GDP grew 7% on the year.

While remaining healthy, the Chilean economy still faces external risks, stemming especially from events in Europe.

"Given the latest developments out of Greece, there's a much-lower probability of an adverse scenario, but the risks haven't disappeared," Puente said.

He noted that there is still political risk in Greece ahead of the country's April elections as well as risk of a disorderly default and contagion into Portugal.

-By Carolina Pica, Dow Jones Newswires; 56-2-715-8919; carolina.pica@dowjones.com

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