Bloomberg News

Chilean Central Bank Must Not Act Too Late, De Gregorio Says

October 19, 2011

(Updates with finance minister’s comments in 11th paragraph and IMF director’s comments in 14th paragraph.)

Oct. 19 (Bloomberg) -- Chile’s central bank mustn’t hesitate to act in time to protect the country from a deterioration of the global economy, bank President Jose De Gregorio told a conference in Santiago today.

“It is important that, in general, monetary policy doesn’t act late nor in insufficient doses,” De Gregorio said. “But it is also important that it doesn’t act precipitately. Monetary policy that reverses bias because the diagnosis was wrong loses credibility. Potential delays can be compensated for with aggression.”

Authorities could compensate for a late response with aggressive action like they did after Lehman Brothers Holdings Inc. collapsed in September 2008, when they waited until January 2009 to cut their benchmark interest rate, he said. Chile, which now has the third-highest key rate of major Latin American countries, is “very well prepared,” De Gregorio said.

The central bank has kept borrowing costs unchanged for four straight months and in the last meeting said it may change rates should economic conditions worsen. Economists expect policy makers to keep borrowing costs unchanged at 5.25 percent next month and lower them to 5 percent in December, according to the median of 60 forecasts in an Oct. 11 central bank survey.

“De Gregorio hinted that the bank won’t likely rush to start to ease monetary policy,” Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc., wrote in a note. “Unless there is a very significant and sudden deterioration of the global outlook, the probability mass of the first rate cut shifts towards December, rather than November.”

Global Effect

Policy makers are focused on the effects of slowing global growth on the Chilean economy, De Gregorio said.

Chilean economists are divided on the risk of inflation the economy faces.

Banco Santander Chile expects inflation to slow to 2.2 percent in 2012. Banco de Credito e Inversiones has said that it could end next year at 4 percent. The central bank targets 3 percent inflation.

The peso fell 0.1 percent to 511.51 per dollar from 510.92 yesterday.

“We know how to confront financial turbulence and international recessions,” De Gregorio said in reference to the impact of Lehman Brothers’ fall. “But there also are reasons for increased concern. We don’t know to what extent emerging economies could grow if the developed ones remain weak.”

The world’s leading copper producer will grow about 4.7 percent in the second half of 2011 after expanding 8.4 percent in the six months through June, Finance Minister Felipe Larrain said at the same event, which was hosted by Chile’s Development University and the manufacturing association known as Sofofa.

Wealth Fund

Chile “undoubtedly” will miss the government’s 5 percent growth forecast next year if the global economy falls into a recession, he said. If the world contracts, Chile could tap into sovereign wealth funds that hold more than $18 billion as part of a contingency plan that would boost growth, employment and investment, he said.

“If things deteriorate, we will react,” Larrain said. “We can react with fiscal policy as well as monetary policy. There are many countries in the world that are unable to respond.”

Monetary policy will be Latin America’s “first line of defense” as the global crisis mounts, Nicolas Eyzaguirre, director of the International Monetary Fund’s Western Hemisphere division, said at today’s event.

“One thing that is very important, because we surely are going to have weeks of terror before a final solution arrives, is to keep liquidity levels fluid,” he said. “We could have new storms afflicting our coasts. But with clarity and our hands firmly on the rudder, we should prevail.”

--Editors: James Attwood, Richard Jarvie

To contact the reporters on this story: Randall Woods in Santiago at rwoods13@bloomberg.net; Sebastian Boyd in Santiago at sboyd9@bloomberg.net

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


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