Bloomberg News

Chile Slows Pace of Rate Rise as 5.25% Seen Near ‘Neutral’

June 15, 2011

(Updates with rate swaps in 13th paragraph, breakeven inflation in 17th paragraph.)

June 15 (Bloomberg) -- Chilean policy makers yesterday slowed the pace of interest-rate increases as growth in South America’s fifth-biggest economy eases and inflation expectations decline.

The central bank’s five-member policy board, led by bank President Jose De Gregorio, raised the overnight rate by a quarter-point to 5.25 percent, matching the forecast of 16 of 19 economists surveyed by Bloomberg. Two analysts expected a fourth straight half-point increase and one forecast a pause.

Economists surveyed earlier this month by the central bank lowered their estimates for inflation this year and next while also cutting their 2012 and 2013 gross domestic product forecasts after a report showed that year-on-year growth eased to 6.3 percent in April. After policy makers raised the overnight rate by a half-point at their May 12 meeting, they characterized their 5 percent policy rate as closer to a level that strikes a balance between economic growth and inflation.

“Considering that we’re arriving at a neutral level, there could be one or two additional increases,” said Cristobal Doberti, chief economist at Bice Inversiones in Santiago who correctly forecasted the bank’s decision. “We can’t rule out another quarter-point increase in the next meeting.”

Chile’s demand, activity and labor market reflect a vigorous economy, the central bank said in the statement accompanying yesterday’s decision.

Growth, Peso

The $203 billion economy expanded 9.8 percent in the three months through March from the previous year, its fastest quarterly growth since 1995. In the first quarter last year, Chile was recovering from the Feb. 27, 8.8-magnitude earthquake that caused an estimated $30 billion of damage.

Growth in April, as measured by the IMACEC economic activity indicator, rose less than the 6.9 percent forecast by 12 economists surveyed by Bloomberg. Chile’s gross domestic product will rise 6.2 percent in the second quarter from a year earlier, according to the median estimate of 70 economists in a June 10 central bank survey.

The peso has gained 14 percent in the past 12 months, the best performance against the dollar among the seven major Latin American currencies tracked by Bloomberg.

Chile’s currency has declined 0.4 percent since Jan. 3, when the central bank announced plans to buy $12 billion in U.S. dollars to limit the peso’s gains and increase international reserves.

Policy Options

After last month’s half-point increase, policy makers said they would only sustain that pace if inflationary pressures increased.

“Most probably, future increases will be carried out more gradually and pauses will be seen,” central bank board member Enrique Marshall said in prepared remarks posted on the bank’s website May 23. “Movements similar to those of previous months can’t be ruled out if inflationary risks intensify.”

The central bank “in the most probable scenario” will need to continue raising interest rates depending on economic conditions, according to yesterday’s statement.

Chile’s one-year interest-rate swaps, which reflect traders’ views of future rate decisions, fell two basis points, or 0.02 percent point, to 5.65 percent at 9:04 a.m. New York time.

Consumer prices rose 3.2 percent in April from the previous year and 3.3 percent in May, within the central bank’s target range of 2 percent to 4 percent.

“Annual registers of CPI inflation have stayed around 3 percent and core inflation registers remain contained,” according to policy makers’ statement. “Private inflationary expectations show a decline, although some of them remain above the target.”

‘Under Control’

Annual inflation will quicken to 3.5 percent in 12 months before slipping to 3.35 percent in two years, according to the median of 57 traders and investors in a June 8 central bank survey. Traders estimated annual inflation would reach 3.7 percent in a year in the previous survey published in May.

Two-year breakeven inflation, which reflects views of average price increases, was little changed at 3.55 percent at 9:06 a.m. New York time. The rate was 3.61 percent the day before the May meeting.

Inflation estimates have declined on higher borrowing costs, 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.

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.

Lower inflation expectations give the central bank leeway to reduce the pace of rate increases, which will help prevent the peso from appreciating further, the minister said.

“The main philosophy behind a quarter-point increase is that the bank still considers inflation to be under control,” Alfredo Coutino, Latin America director at Moody’s Analytics, said in a June 13 telephone yesterday from West Chester, Pennsylvania, after forecasting a half-point increase. “It’s saying, ‘We don’t have problems with inflation now because it’s close to the target.’”

--With assistance from Dominic Carey and Fernando Simon in Sao Paulo and Nathan Crooks and Eduardo Thomson in Santiago. Editors: Robert Jameson, James Attwood

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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