Chile’s central bank raised its forecast for economic growth this year to between 4.75 percent and 5.25 percent and said it expects gross domestic product to expand 4 percent to 5 percent in 2013.
The bank in June had forecast economic growth of 4 percent to 5 percent for 2012. Policy makers expect stable interest rates in the short term and inflation of 2.5 percent this year and 3 percent in 2013, the bank said today in its quarterly monetary-policy report. The bank had in June expected inflation of 2.7 percent in 2012 and 3 percent next year.
Policy makers raised their growth forecast on higher personal incomes due to low unemployment, increased access to credit for consumers and companies and investment in mining driven by the high price for Chile’s main export, copper. At the same time it said a global slowdown may damp exports and growth, and warned that it expected renewed periods of tension in international financial markets.
“Monetary policy faces two opposing forces,” central bank President Rodrigo Vergara told Senators today in Valparaiso, according to copies of his speech distributed to journalists in Santiago. “On one hand, a weak external scenario that won’t add further stimulus to the economy. On the other hand, strong domestic activity and demand with a tight labor market and little spare capacity.”
The bank said it expects inflation of 2.9 percent in about two years’ time, undershooting its 3 percent target.
Since the central bank’s last monetary-policy report in June, Vergara has seen economic growth beat economists’ forecasts and annual inflation decelerate to a 20-month low in July. The central bank has left its benchmark interest rate unchanged at 5 percent since January. Traders and investors expect the central bank to leave rates on hold for the rest of the year and lower the rate by a quarter point to 4.75 percent in the next six months, according to a bank survey published on Aug. 22.
“The central bank’s wait-and-see policy has been very successful,” said Sebastian Brown, a strategist at Barclays Capital in New York. “But the best Chile can hope for is to manage the slowdown.”
Chile’s stable interest rates at a time when the central banks of Colombia and Brazil have lowered borrowing costs helped make the Chilean peso the most attractive currency in the world to invest in. Investors in the peso would have returned 11.7 percent this year, more than any other currency tracked by Bloomberg.
The currency’s rise and stable domestic consumer prices mean that Chile’s inflation-adjusted exchange rate reached the highest since December 2010 in July. That led to speculation the central bank would consider buying dollars to weaken the currency as it did in January 2011.
While the bank reserves the right to intervene in the currency when the real exchange rate is out of line with its fundamental drivers, “in current circumstances, it is not evident that those criteria apply,” Vergara said.
“The current real exchange rate, while low compared to a few months ago and relative to its average of the last 15 to 20 years, is within the range that fits with its fundamental drivers,” Vergara said. “An intervention has a significant financial cost for the central bank and the country.”
The bank raised its forecast for import growth this year to 5.8 percent from 4.9 percent in its June report. It lowered its forecast for export growth to 3.6 percent from 3.9 percent.
The bank projects a current-account deficit equivalent to 3.2 percent of gross domestic product for 2012, widening to 4.4 percent next year. In June it had projected a 3.1 percent current-account deficit this year.
Chile’s terms of trade may worsen as the price of copper remains little changed while the price of its main import, oil, is higher than it forecast in June and food prices have risen.
The bank left its average copper price forecasts unchanged at $3.55 a pound for this year and $3.4 a pound for 2013. In 2014, copper may average $3.5 a pound, it said. The price of copper has averaged $3.6028 a pound on the Comex in New York this year. The metal accounts for more than half of Chile’s exports.
According to prices in the forwards market for unidades de fomento, Chile’s inflation-linked accounting unit, traders yesterday expected annual inflation to end the year at 2.11 percent. That is the highest projection since June. Traders expect annual inflation to slow below the central bank’s target range in February before accelerating again.
In the last two months breakeven inflation rates, a measure of the future pace of price rises being discounted by the swaps market, have converged on and in some cases passed the bank’s central target of 3 percent.
The one-year breakeven inflation rate rose to 3.18 percent yesterday from 1.73 percent in July. The two-year rate rose to 3 percent, in line with the bank’s target, from 2 percent, the bottom of the bank’s target range on July 13. Three-year breakeven inflation in the swaps market was also 3 percent yesterday. Five-year breakeven inflation measured in the bonds market was 2.99 percent.
The central bank targets 3 percent inflation in two years’ time with a margin of error of 1 percentage point on either side.
“Growth has been above what you would expect GDP in Chile to be, inflation and inflation expectations have been well- behaved,” said Bret Rosen, a strategist at Standard Chartered Plc in New York. “The central bank’s policy has been pretty pragmatic. They have been generally neutral since January.”
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