Chile Reports Fastest Economic Growth in Five Years on Retail, Transport

Chile’s economy grew at the fastest annual pace in almost five years in May as the retail, utility, transportation and communications industries helped the country recover from February’s devastating earthquake.

Economic activity expanded 7.1 percent in May from a year earlier and a seasonally adjusted 1.4 percent from April, the central bank said today on its website. Economists had forecast annual growth of 5.3 percent, according to the median estimate of nine analysts surveyed by Bloomberg.

The larger-than-forecast jump, the fastest since a 7.2 percent annual expansion in June 2005, cements expectations that the central bank will continue to increase interest rates this month after raising rates in June for the first time since September 2008, Jorge Selaive, chief economist at BCI Corredor de Bolsa in Santiago, said in a note to investors today.

“These growth figures continue to put pressure on the central bank before the next meeting on interest rates, where we think an increase of 50 basis points is guaranteed,” Selaive said.

The Chilean peso fell 0.1 percent to 537.85 per U.S. dollar as of 10:24 a.m. New York time, from 537.15 on July 2. It earlier reached 534.38 per dollar, the strongest since June 23.

Chile’s economy continues to recover from an 8.8 magnitude earthquake on Feb. 27 that caused almost $30 billion in damage by toppling roads, destroying ports and shutting down factories.

Earthquake Recovery

Industrial output in May increased for the first time since February, climbing 4.2 percent from a year earlier, the National Statistics Institute said June 30. Retail sales jumped 19.1 percent from a year earlier, supermarket sales rose 7.2 percent and industrial sales increased by 0.5 percent.

“Economic activity in Chile has surpassed not only levels seen before the earthquake, but also levels seen before the subprime crisis,” Rodrigo Aravena, an economist with Banchile Inversiones, said in a telephone interview from Santiago today.

Chile’s economy has been “surprisingly” dynamic following the temblor, central bank President Jose De Gregorio said July 2.

“From a macroeconomic perspective, although reconstruction still must be done and some companies still are having problems, things on the whole are recovering,” he said in a speech to Chile’s Mining Society Sonami in Santiago.

The economy will grow 4 percent to 5 percent this year as consumer prices rise 3.8 percent, the bank said June 16 in its quarterly monetary policy report.

Rate Outlook

Chile’s central bank probably will continue to raise borrowing costs after lifting its benchmark rate by half a percentage point to 1 percent in June, De Gregorio said.

The median forecast of 36 traders and investors in a June 22 central bank survey showed the bank will lift the overnight rate a half-point this month to 1.5 percent.

Policy makers at the central bank probably will debate increasing the benchmark rate by 50 basis points or 75 basis points, to 1.5 percent or 1.75 percent, at the July meeting, Banchile’s Aravena said today.

“If general inflation increases more than expected, the central bank could increase rates by 0.75 percentage point,” he said. The median of 11 economists surveyed by Bloomberg is for prices to climb 0.2 percent in June from May.

Annual inflation in May accelerated to 1.5 percent, from 0.9 percent in April. The central bank targets inflation of 3 percent plus or minus a percentage point. Prices in the inflation forwards market imply inflation will rise to 3.7 percent this year, according to Banco Santander SA prices.

The three-month interest-rate swap rate rose 12 basis points today to 1.77 percent, the highest since June 11, and the six- month rate jumped nine basis points to 2.3 percent as traders priced in a faster trajectory for central bank rate increases.

Chile’s National Statistics Institute will publish June inflation figures on July 8.

To contact the reporter on this story: Randy Woods in Santiago at rwoods13@bloomberg.net or Sebastian Boyd in Santiago at sboyd9@bloomberg.net

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