BLBG: Chile Raises Main Interest Rate to 4.5% as Investors Forecast Pace to Slow
Chile’s central bank raised its benchmark interest rate for the tenth time in 11 months yesterday in a bid to anchor inflation expectations and give policy makers leeway to slow the pace of rate increases in the months ahead.
The five-member policy board, led by bank President Jose De Gregorio, raised the overnight rate by a half-point for the second straight month to 4.5 percent, matching the forecast of 19 of 21 economists surveyed by Bloomberg. Two analysts expected a quarter-point increase to 4.25 percent.
Chile accelerated the pace of rate increases in March after a quarter-point increase in February and a pause in January to contain the effect of rising energy prices on inflation expectations. The central bank yesterday sustained the March tempo as prices and economic growth quicken, giving policy makers room to ease the pace of rate increases if inflation expectations improve, Cristobal Doberti, chief economist at Bice Inversiones, said.
“If inflation expectations moderate, we could return to the slower pace of increases,” Doberti said from Santiago after the bank’s decision. “However, if inflation expectations don’t change, we probably will see another half-point increase.”
Chile’s peso gained 0.4 percent to 471.85 per U.S. dollar at 7:34 a.m. New York time from 473.86 yesterday.
Rate Horizon
Chile’s three-month interest-rate swap, which reflects traders’ views of future rates, traded at 4.79 percent yesterday before the bank decision. The rate implied a half-point increase yesterday followed by a quarter-point increases in May and June, according to Bloomberg calculations.
Policy makers will raise borrowing costs by a quarter-point in May to 4.75 percent, according to the median forecast of 71 economists in an April 12 central bank survey. Lending costs will reach 5.5 percent by September and 6 percent by December this year, according to the survey.
The benchmark rate will reach 5.75 percent in six months and 6 percent in a year, according to the median estimate of 51 traders and investors in a central bank survey published today.
“The interest rate will tend to be closer to a neutral rate by the end of the year,” Alejandro Puente, an economist with Banco Bilbao Vizcaya Argentaria SA (BBVA) in Santiago, said in an interview. A neutral rate -- that would neither pressure consumer prices to rise or fall -- would be 5.5 percent to 6 percent, he said.
Neutral rates in Chile could be closer to 5.25 percent or 5.5 percent because global interest rates are lower than four or five years ago, when the South American country’s neutral rate exceeded 6 percent, Jorge Selaive, chief economist at Banco de Credito & Inversiones in Santiago, said yesterday.
Market, Policy Maker View
One-year breakeven inflation, which reflects traders’ view of average price increases over the next 12 months, fell to 4.30 percent yesterday before the bank decision from 4.42 percent April 11. Two-year breakeven inflation fell to 4.15 percent from 4.18 percent over the same timeframe.
Consumer prices rose 0.8 percent in March from February, the fastest since September 2009, the National Statistics Institute said last week. Consumer prices will rise 0.4 percent in April from March, according to today’s survey of traders and investors.
Inflation excluding fuel and produce rose 0.4 percent in March from the previous month, matching the pace reached in September 2010, the institute said.
Target Range
Annual inflation will accelerate to 4.3 percent by year-end from 3.4 percent in March, the central bank said in its latest quarterly monetary policy report, published April 4. The bank targets annual inflation of 3 percent, plus or minus 1 percentage point, over a two-year horizon.
Chile’s annual inflation rate will return to levels within the bank’s target range by the second quarter of next year before closing 2012 at 3 percent, De Gregorio told senators April 4.
Policy makers are concerned higher oil prices could create inflationary pressures on other consumer goods, he said. Chile imports 99 percent of its oil, whose price in the Brent futures market rose 5 percent in March to $117.36 a barrel.
“We confront important risks,” De Gregorio told senators in reference to international price shocks. “Those shocks could spread from specific sectors to remaining prices in the economy. Preventing that spread today is the principal task of monetary policy.”
Remove Stimulus
The central bank said in a statement accompanying yesterday’s decision it would continue to remove the monetary stimulus at a pace that depends on economic conditions.
Chile’s economic growth also could contribute to inflationary pressures if demand exceeds output capacity, De Gregorio told senators.
“Chile’s economic recovery has consolidated and output gaps are closed,” De Gregorio said. “It can’t be ruled out that activity and demand will evolve above expectations, causing them to exceed normal levels of productive capacity use in the economy and, as a result, causing inflationary pressures.”
The economy will grow as much as 6.5 percent this year, which would be the fastest annual expansion in more than 10 years, policy makers said in their policy report. Chile’s gross domestic product rose 5.2 percent in 2010.
To contact the reporter on this story: Randy Woods in Santiago at rwoods13@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net
