SANTIAGO: Chile's central bank held its key rate at 5.0 percent for a third month running as expected on Tuesday and is seen remaining on hold in coming months.
A softer-than-feared economic slowdown has offset concerns about the health of the global economy.
In addition, a string of data on expected jobs, economic activity and manufacturing that has topped expectations, coupled with an uptick in domestic inflation has flipped market bets to forecasting a rate rise later this year versus forecasts for rate cuts a couple of months ago.
"What the market is expecting is that towards the end of the year, we're going to likely see a considerable improvement of the situation abroad, specifically in Europe, and that could ultimately pressure to hike the interest rate," said Sergio Tricio, head of research at Forex Chile.
The central bank said annual inflation was at the high end of its 2.0-4.0 percent tolerance range, while inflation expectations were holding around its policy horizon target.
The bank said in a communique that the labor market remained tight, while economic activity and domestic demand were evolving as forecast.
In the coming months the bank will likely wait and see how Chinese demand for copper, Chile's top export, and other commodities develops and how the course of domestic inflation evolves before likely hiking the key interest rate later in the year, analysts say.
"The risks are balanced, there's greater strength domestically, but there's also weakness abroad which still hasn't impacted Chile, and that risk is still there, and that's why the central has to wait and see," Tricio said.
That is in marked contrast with Brazil's central bank, which has slashed its benchmark interest rate to boost the economy as inflation retreats. The Brazilian bank is expected to cut rates to near an all-time low later this week, slashing borrowing costs for the sixth meeting in a row.
Peru's central bank, meanwhile, held its benchmark interest rate steady at 4.25 percent for the 11th straight month last week as growth slows slightly and it bet that inflation will moderate.
Chile's central bank cut rates for the first time in 2-1/2 years in January on fears that key demand in Europe and top trading partner China would turn sluggish and hit Chile's open, export-dependent economy.
Expectations "derived from polls of analysts and prices of assets have brought forward the first expected rate hike, which is seen between September and December of this year," the central bank said in a report late on Monday.
Central Bank President Rodrigo Vergara has said the rate is at levels neutral to the economy, which in monetary policy speak means a rate that is seen neither spurring nor curbing economic growth.
In its latest quarterly monetary policy report issued earlier this month, the bank hiked its 2012 inflation expectations to 3.5 percent from a previous 2.7 percent view and upwardly revised its gross domestic product growth forecast to between 4.0 and 5.0 percent this year, up from a previous forecast of 3.75 to 4.75 percent range.
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