Bloomberg News

Chile May Slow Pace of Rate Increases as CPI, Growth Ease

June 14, 2011

(Updates markets in fifth, 10th and 16th paragraphs.)

June 14 (Bloomberg) -- Chile’s central bank probably will slow the pace of interest rate increases today as declining inflation expectations and moderating economic growth help keep consumer price pressures in check.

The five-member board, led by bank President Jose De Gregorio, will increase the benchmark rate by a quarter-point to 5.25 percent, according to 15 of 19 economists surveyed by Bloomberg. Two analysts forecast a fourth-straight half-point rate increase while two others forecast a pause.

Since policy makers’ May meeting, analysts surveyed monthly by the central bank have lowered their estimates for inflation this year and next while also cutting their 2012 and 2013 gross domestic product forecasts after reports showed year-on-year growth eased to 6.3 percent in April. Central bank board members last month characterized their 5 percent policy rate as closer to a level that strikes a balance between economic growth and inflation.

“In the previous minutes, the central bank implied that the neutral rate might be lower, which suggests that they are getting closer to the end of their hiking cycle,” Katia Diaz, an economist at 4Cast Inc. in New York, said in an e-mail response to questions. Diaz estimates that the benchmark rate could close the year at 5.5 percent.

The peso rose 0.3 percent to 466.45 per U.S. dollar at 11:31 a.m. New York time today, boosting its 12-month rally to 15 percent, the best performance among the seven major Latin American currencies tracked by Bloomberg.

‘Not Overheating’

Building on a 5.2 percent expansion in 2010, the $203 billion economy grew 9.8 percent in the first quarter from the previous year, when Chile was recovering from an 8.8-magnitude earthquake that struck Feb. 27, 2010.

By April, with borrowing costs at a two-year high, growth, as measured by the IMACEC economic activity indicator, rose less than the expected 6.9 percent by 12 economists surveyed by Bloomberg.

“The economy is in a stage of major recovery and we’re not overheating,” Rodrigo Aravena, chief economist at Banchile Inversiones, said via telephone the day the bank posted the economic report.

Chile’s unemployment rate unexpectedly fell in the three months through April to 7 percent from 7.3 percent through March, the National Statistics Institute said in a May 31 report. Annual salary increases slowed in April to 5.9 percent from 6.3 percent in March, the institute said June 7.

Six-month breakeven inflation, which reflects views of average price increases, fell seven basis points to 4.13 percent the day after the bank published the economic activity report. Breakeven inflation was 4.37 percent at 9:05 a.m. today.

‘Resolve’

Economists reduced annual inflation estimates for year-end to 4.2 percent in a June 10 central bank survey from 4.3 percent in the May survey and 4.4 percent in April.

The central bank targets annual inflation of 3 percent with a 1 percentage point margin of error over two years.

Inflation estimates have declined on higher lending rates, government efforts to cut planned spending by 0.4 percent of gross domestic product this year and weaker global price pressures, Finance Minister Felipe Larrain told reporters in Santiago June 2.

“Coupled with a growing economy that was creating jobs, we previously experienced price rises,” Larrain said. “Today we’re seeing an improved inflation outlook thanks to the resolve of the central bank and the government, which tightened its belt, and a decrease in some international prices.”

‘Could Be Pauses’

Economists in the bank’s June 10 survey cut their 2012 and 2013 GDP growth forecasts to 5.3 percent and 5.0 percent respectively from 5.5 percent and 5.1 percent in April. They held their 2011 GDP estimate at 6.3 percent in the most recent survey.

Bloomberg’s commodity index, which calculates the mean of indexes including energy, grains, food, precious metals and livestock, has declined 4.3 percent from the beginning of March through yesterday’s close.

Consumer prices rose 0.4 percent in May from the previous month and 3.3 percent from last year, the National Statistics Institute reported June 8. Core consumer prices, which exclude fuel and produce, rose 0.3 percent in May from April.

The central bank, which has raised lending costs in 11 of the past 12 monthly meetings, is unlikely to continue with half- point increases unless inflationary risks increase, De Gregorio said May 20 speech in Santiago.

“No scenario can be ruled out,” De Gregorio said about monetary policy. “It’s probable that in future meetings the magnitude will be lower, and there even could be pauses.”

Policy makers haven’t finished raising rates this year, which at 5 percent are the fourth-highest among major Latin American economies, the central bank said in a statement accompanying its May meeting.

Among the major Latin American countries that target inflation, Chile along with Brazil, Peru and Colombia have all raised borrowing costs four times in 2011 while Mexico has paused since 2009.

The neutral rate could be lower than in the past as countries like the U.S. and Japan keep lending costs near zero, policy makers said at their May meeting.

--With assistance from Dominic Carey and Fernando Simon in Sao Paulo. Editors: Robert Jameson, Jonathan Roeder

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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