(Updates with market inflation indicators in second and eighth paragraphs, swaps and peso in ninth and 10th.)
Feb. 7 (Bloomberg) -- Chile’s central bank President Rodrigo Vergara will watch tomorrow’s inflation numbers with extra interest as faster-than-expected growth and inflation raise concern he jumped the gun in cutting rates last month.
Consumer prices rose 4.3 percent in January from the year earlier, the second consecutive month above the central bank’s 2 percent to 4 percent target range, according to the median forecast of 14 economists surveyed by Bloomberg. Traders today are pricing in 4.39 percent inflation, 0.06 percentage point more than they were yesterday. The consumer-price report will be released at 8 a.m. in Santiago.
After just five weeks in the job, Vergara unexpectedly cut the benchmark interest rate a quarter point to 5 percent on Jan. 12. Since then, data have showed that unemployment fell to the lowest since before the recession of 2009 in the fourth quarter, while economic growth unexpectedly accelerated in December and retail sales grew at the fastest pace in six months.
“It was premature for the central bank to decide to cut rates instead of just waiting and seeing what would happen,” Alfredo Coutino, Latin America director at Moody’s Analytics, said from West Chester in Pennsylvania. “The main argument was that it cut the rate because of the deterioration of external conditions, and I don’t think that happened.”
Since the decision, traders have increased inflation expectations for this year to 3.23 percent from 2.76 percent. Forwards for unidades de fomento, Chile’s inflation-linked currency unit, are discounting 4.39 percent annual inflation in January, or 0.25 percent for the month.
‘Taking a Risk’
“There’s a risk inflation beats expectations; it is even probable it rises above 5 percent in the first half,” said Leonardo Suarez, chief economist at Larrain Vial SA in Santiago. “We have had double-digit demand growth in 2010 and 2011. The central bank is taking a risk and they probably don’t have much more space to cut.”
December’s inflation rate of 4.4 percent was 0.4 percentage points above the median forecast of analysts and the highest since April 2009.
Breakeven inflation, a measure of the average future price rises implied by the swap market, rose today. One-year breakeven inflation climbed five basis points to a six-month high of 3.20 percent, while the two-year rate gained six basis points to 3.06 percent.
Traders are pricing in higher future interest rates. Two- year interest-rate swaps today climbed for an eighth straight day, increasing six basis points to 4.71 percent. That’s the highest since August and a 36 basis point increase from Jan. 13.
Less to More
The peso strengthened 0.3 percent to 478.55 per U.S. dollar, its second-highest close since September. The currency gained further in the interbank grey market to 477.95 per dollar as of 2:40 p.m. in Santiago, according to prices from Datatec.
Chile’s economy may go “from less to more” in 2012, buoyed by mining exports and consumer spending, Suarez said.
The economy expanded at the fastest pace in 17 months in December on gains in retailing, mining and communications, the central bank said yesterday. The economy climbed 1.3 percent from the previous month on a seasonally adjusted basis, compared with 0.8 percent the month before.
In the same month, retail sales leaped 10.1 percent, while unemployment dropped to 6.6 percent in the last three months of the year, half a percentage point below the median estimate of analysts surveyed by Bloomberg.
Better Than Expected
“The world did a lot better than expected in January and commodities rose,” said Cesar Guzman, an economist at Banco Security in Santiago. “It’s a more inflationary world.”
Still, last month’s inflation was partly due to the depreciation of the peso, Guzman said. The currency weakened 5.7 percent in the last two months of 2011, leading to a 12 percent gain in the peso price of oil, the country’s biggest import.
“There were some short-term shocks that explain the higher inflation,” said Rodrigo Aravena, chief economist at Banchile Inversiones. “It wasn’t through overheating.”
Increases in food prices because of drought in Chile and an outbreak of foot-and-mouth disease in Paraguay, which supplies 63 percent of Chile’s beef, are to blame, he said. The central bank has called the jump in inflation in December “transitory.”
Temporary or not, Vergara may decide to hold the benchmark rate at 5 percent this month because of the strong U.S. jobs numbers, Aravena said. The U.S. jobless rate fell to 8.3 percent in January, the lowest since February 2009.
With U.S. demand rising, Europe’s debt crisis on hold for now and domestic retail sales rising above 10 percent a year, Vergara may begin to rue January’s decision.
“People are becoming convinced that Chile has an inflation problem,” Coutino said. “In that sense, it seems markets are realizing that most probably it wasn’t a good idea to cut the interest rate at the beginning of the year.”
--Editors: Philip Sanders, Harry Maurer
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