Chile central bank holds rates low as economy grows

Chile's central bank held its benchmark interest rate unchanged for the eighth straight month on Thursday to help fuel an economy that had just pulled out of recession when a destructive earthquake hit last month.
The bank maintained its overnight rate at 0.50 percent in its first rate decision since the February 27 quake and tsunamis that killed hundreds of people and mangled much of south-central Chile, and it upheld its stance of holding rates at a minimum level until at least the second quarter.
"It's expected that the immediate disruptive effects of the catastrophe will lead to lower levels of activity and greater inflation in the very short term," the central bank said. "For the medium term, the macroeconomic picture will be determined by productivity and the size, duration and form of financing of reconstruction efforts."
President Sebastian Pinera, a center-right businessman sworn in last week amid strong aftershocks, said in a televised statement that his government will bring back balance to fiscal accounts during the years-long reconstruction. "I want to reiterate our commitment to a responsible macro-economic policy, maintaining competitiveness and recovering the structural fiscal balance," he said.
Low rates are seen helping the Chilean economy withstand the worst of the quake that flattened whole fishing villages, damaged forestry infrastructure and mangled roads. Economists generally expect monetary tightening to come even later than the second quarter and rates to gradually rise from the recession-inspired lows, speculating the central bank is not overly concerned about temporary inflationary pressure from shortages following the earthquake.
Consumer prices fell 1.4 percent in 2009 and only began to rise on an annual basis in February. Before the earthquake, the central bank had forecast 2.5 percent inflation for 2010. Also on Thursday, the central bank said Chile's economy expanded 2.1 percent in the fourth quarter of 2009 after three quarters of contraction, officially ending the country's first recession in a decade.
Gross domestic product still shrank 1.5 percent in full year 2009 in the wake of the financial global crisis, the central bank said, but that was not as bad as the bank's previous estimate for contraction of 1.9 percent. On a seasonally adjusted basis, gross domestic product shrank 1.4 percent in 2009.
The government has estimated earthquake damage at $30 billion but the economy is seen as standing a good chance of recovering quickly, in part because copper prices are holding about 25 percent above what the government budgeted for 2010. "The central bank makes the observation that the economy was outperforming leading up to the earthquake and that the demand-supply gap was narrowing faster than expected," said David Duarte, an analyst with 4Cast.