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As Chile's economy slows, interest rates expected to hold steady

Chile's Chuquicamata open-pit copper mine. Some analysts say a sharper slowdown is unavoidable if prices for copper, the country's top export, fall further.

Ivan Alvarado/Reuters

Chile's economy grew more slowly in the first quarter than in the prior three months as an expected slowdown took hold, the central bank said on Friday, reinforcing expectations the bank will keep its key interest rate steady in coming months.

The economy expanded a seasonally adjusted 1.4 per cent in the first quarter of this year compared with a 2.0-per-cent expansion in the fourth quarter of 2011 versus the third.

Chile's gross domestic product increased 5.6 per cent, as widely forecast, from a year earlier, while domestic demand rose 4.9 per cent in the first quarter from a year prior, the bank added.

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Seasonally adjusted GDP "is showing a deceleration toward trend growth rates ... with output gaps closed, the economy growing at trend growth and the interest rate within a range considered neutral, the truth is that the central bank shouldn't move the interest rate," said Cesar Guzman, an economist with Inversiones Security in Santiago.

"The next possible rate move, which won't come before five or six months' time, will depend on how the situation in the euro zone evolves," Mr. Guzman added.

On Thursday, the Chilean monetary authority held its key rate steady at 5.0 per cent for a fourth month running, citing risks associated with the euro zone's financial turmoil, a tight local labour market and easing short-term domestic inflation expectations in its decision.

The central bank is expected to continue with its "wait-and-see" stance and remain on hold in coming months as it watches how events unfold in Greece and elsewhere in Europe, although some see a rate hike toward the end of the year.

"The central bank was expecting this slowdown and once the noise surrounding the euro zone dies down we expect the central bank will hike the interest rate in the fourth quarter," said Mario Arend, chief economist with Celfin Capital.

"We see the bank hiking the rate to 5.25 per cent in the fourth quarter," Mr. Arend said.

Should the euro zone crisis deepen and prices for commodities such as Chile's top export, copper, fall further, some analysts say a sharper slowdown in Chile's small and export-dependent economy is nearly unavoidable and rate cuts are a possibility.

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"We suspect that the first quarter may be as good as it gets for Chile this year," David Rees, emerging markets economist at Capital Economics, said in a note to investors.

"With copper prices already down by about 10 per cent so far this month and likely to fall further as global headwinds intensify, we expect GDP growth to slow over the coming quarters. As a result, we continue to think that interest rates could be cut later this year," Mr. Rees said.

According to the central bank's latest quarterly monetary policy report, published in April, Chile's economy is seen expanding between 4.0 and 5.0 per cent this year, up from the previous range of 3.75 to 4.75 per cent.


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