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Wednesday, August 8, 2012

Is Chile following Brazil and Colombia?

Colombia on july shocked the market with an interest rate cut (its first in two years) because of expectations of lower growth ahead. 

Will Chile follow suit this month?

Bold moves have been something of a hallmark of Chilean central bank monetary policy in the past, but as things stand, the odds are that the bank will sit out on a cut and leave its key policy rate at 5 per cent for a seventh straight month.

Rodrigo Vergara, the bank president, hinted as much on Tuesday, even though he acknowledged slowing growth in the second part of the year a party-pooperish thing to bring up just one day after Chile posted better than-expected 6.2 per cent growth in June (way outstripping expectations of a 5.6 per cent expansion), and first-half growth of 5.5 per cent.

That strong growth result makes a rate cut unlikely. 

The next policy meeting is due on August 16.

Monetary policy must be prudent and transparent in explaining its decisions. 

Acting hastily will only reduce the capacity to act.

Chile an export-orientated economy  is, he pointed out, unlikely to escape the international situation (read global slowdown and euro woes, which are surely only going to get worse now Standard & Poor’s has cut Greece’s outlook to negative) unscathed.

However Vergara also said it was “unreasonable” to imagine that it would be severely affected. 

His message: seize the opportunities but remember the risks “which exist, and are significant”.

Like what then?

Well, look no further than the trade numbers published on tuesday. 

Output of Chile’s top export earner, copper  the country is the world’s top producing nation fell, pushing the country into a $95m deficit in July after a $1.04bn surplus in june.

Vergara also signalled volatility ahead for the peso, which is trading near six-month highs.

But at least inflation is behaving though Vergara cautioned against reading too much into recent surprises (like June’s negative reading).

July data is out on Wednesday and is expected to remain flat. 

But the central bank promises to keep vigilant.

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