Bloomberg News

Chile May Keep Rate at 5.25% After Inflation Breached Target

January 12, 2012

(Updates with comments from central bank report in sixth paragraph and latest exchange rate in the last paragraph.)

Jan. 12 (Bloomberg) -- Chilean policy makers probably will keep the benchmark interest rate unchanged today after inflation breached the central bank’s target for the first time in almost three years.

The four-member policy board, led for the second time by bank President Rodrigo Vergara, will keep the overnight rate at 5.25 percent for a seventh straight month, according to 15 of 20 economists surveyed by Bloomberg. Five expect a quarter-point cut. The bank will announce its decision after 6 p.m. local time.

Europe’s debt crisis and five rate increases in the past year have helped rein in economic growth, while failing to prevent inflation from accelerating in each of the past five months. Last month’s 0.6 percent jump in prices, which exceeded all 12 estimates of analysts surveyed by Bloomberg, caused economists including Alejandro Puente to revise their forecasts for a rate cut this month.

“The surprise in December was quite big,” Puente, an economist at Banco Bilbao Vizcaya Argentaria SA in Santiago, said by phone yesterday. It “didn’t just reflect so-called one- time factors.”

Annual inflation accelerated to 4.4 percent in December from 3.9 percent a month earlier, exceeding the top of the central bank’s target of 2 percent to 4 percent over two years for the first time since April 2009.

Analyst Survey

The central bank yesterday played down the jump in prices in December.

“The detailed observation of prices in the consumer price index basket doesn’t produce fundamental changes in recent trends,” the bank’s research department said in a report.

Traders and investors were less sure. According to a central bank survey released yesterday, policy makers will keep the key rate at 5.25 percent today with reductions to 4.75 percent by April and 4.5 percent by July. Two weeks earlier, economists in the survey had forecast a rate cut for today.

The bank last cut rates in July 2009, a year when South America’s fifth-largest economy entered a recession. As the global economy slows once again, policy makers will probably return to rate cuts, economist Alberto Ramos said.

“The option value of waiting a bit longer before cutting seems high,” Goldman Sachs Group Inc.’s Ramos wrote in a Jan. 6 note to investors.

Copper Slump

The world’s top copper producer is feeling the effects of a global deceleration already. Copper prices slumped 21 percent last year and industrial output in October fell for the first time since the aftermath of the February 2010 earthquake that caused an estimated $30 billion in damage.

As a result, Chile will have a “hard time” reaching its goal of 5 percent growth this year after expanding as much as 6.3 percent in 2011, Finance Minister Felipe Larrain said last week.

Elsewhere in the region, Mexico last month kept its benchmark rate unchanged at 4.5 percent for a 23rd straight meeting, while Colombia left its key rate at 4.75 percent in December after raising it in November. Chile’s annual inflation is faster than that in Colombia and Mexico.

Consumer price pressures may decline in Chile this year as the euro area debt crisis erodes global growth, with inflation slipping to 3 percent in 12 months, according to yesterday’s survey of traders and investors.

“Inflation expectations remain well anchored,” Luis Arcentales, an economist at Morgan Stanley, wrote in a Jan. 9 report. “We would argue against those that believe that the Chilean central bank is falling behind the curve. The monetary authorities appear ready to act aggressively, as they did in 2009, if the external backdrop were to turn much weaker.”

Chile’s peso strengthened 0.8 percent to 502.24 per U.S. dollar at 9:17 a.m. Santiago time. The currency has gained 3.5 percent so far this year, trailing the Colombian peso and Brazilian real.

--With assistance from Dominic Carey in Sao Paulo. Editors: Philip Sanders, Harry Maurer

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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