Chile's Economy Expands Faster Than Forecast in July as Retail Sales Jump

Chile’s economy expanded a faster- than-forecast 7.1 percent in July from a year earlier, confirming economists’ expectations the central bank will continue to raise its benchmark interest rate this month.

Economic activity grew 1.3 percent in July from a month earlier on a seasonally-adjusted basis, led by the retail, transport, communications and energy industries, the central bank said today. Analysts had predicted annual growth of 6.5 percent, according to the median forecast of 10 economists surveyed by Bloomberg.

The data help cement expectations the central bank will increase its growth forecasts for 2010 when it publishes its quarterly monetary report this week, Rodrigo Aravena, an economist at Banchile Inversiones, said in Santiago. Policy makers next week probably will raise borrowing costs by half a percentage point for the fourth straight month as Chile’s growth creates pressure on consumer prices, he said.

“The central bank will not cease increasing rates at a fast clip,” Aravena said in a telephone interview. “We should expect short and medium-term inflationary pressure to increase from now until the end of the year.”

Chile has the lowest benchmark interest rate, 2 percent, of Latin America’s major economies, according to data compiled by Bloomberg. The central bank will continue to reduce monetary stimulus amid “very dynamic” economic growth, bank President Jose De Gregorio said in an Aug. 24 speech.

Faster Growth

Policy makers in their most recent quarterly monetary report, published June 16, predicted the economy would grow 4 percent to 5 percent this year. The new report scheduled to be published Sept. 8 will forecast growth exceeding 5 percent, Jorge Selaive, chief economist at Banco de Credito e Inversiones in Santiago, said in a weekly report e-mailed Sept. 6.

Chile is recovering from its worst recession in a decade last year and was hit by an 8.8 magnitude earthquake in February that destroyed roads and factories in a swathe of the country that accounts for 17 percent of its gross domestic product.

July’s result “consolidates the recovery,” Finance Minister Felipe Larrain told reporters in Santiago today, adding economic growth may exceed 5 percent this year. “This is very good news.”

Chile’s peso depreciated 0.3 percent to 497.22 per U.S. dollar at 11:41 a.m. New York time.

The economy grew 6.5 percent in the second quarter from a year earlier, and 1.5 percent in the first quarter.

Internal Demand

Internal demand is driving the post-earthquake recovery, which could peak in October with an annual rate of growth of 8 percent or more, Aravena said.

“Economic activity remains underpinned by strong domestic spending growth,” Florencia Vazquez, an economist with BNP Paribas, said in a note e-mailed to investors today. “The latter, in turn, has remained aloft amid a context of stimulative macro policies and supportive labor market trends.”

The unemployment rate unexpectedly fell to 8.3 percent in the three months through July from 8.5 percent in the three months through June. The jobless rate has declined from 11.6 percent last August and 10 percent at year-end.

Unemployment probably will decline further in the three months through August on economic growth, Cristobal Doberti, chief economist at Bice Inversiones, said in an Aug. 31 interview from Santiago.

“A strong increase in employment obviously leads consumers to spend more, possibly creating more demand for local goods that in turn could contribute to inflationary pressure,” Doberti said. “Local inflation, however, has remained under control.”

Consumer prices rose 0.6 percent in July from June and 2.3 percent from the year before, the National Statistics Institute said Aug. 6. The central bank targets annual inflation of 3 percent within two years.

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.