Chile's Central Bank Increases 2010 Economic Growth, Inflation Estimates

Chile’s economy will probably expand the most in five years as it recovers from last year’s recession and February’s earthquake, the central bank said, raising its forecasts for growth and inflation this year.

Gross domestic product will likely grow 5 percent to 5.5 percent this year while annual inflation may reach 3.9 percent, the bank said in a report today. That compares with estimates of 4 percent to 5 percent GDP growth and 3.8 percent inflation in its previous monetary report published June 16.

Policy makers, who increased the benchmark lending rate by half a percentage point at each of their last three meetings, will continue raising rates as South America’s fifth-largest economy rebounds faster than economists forecast. The economy grew 7.1 percent in July from a year earlier and 6.5 percent in the three months through June.

“After several years of strong turbulence and natural disasters, the Chilean economy is in good position to continue with a sustained rhythm of growth,” central bank President Jose De Gregorio said today in a speech to the Senate.

Monetary stimulus will continue to be removed at a pace determined by internal and external macroeconomic conditions, according to today’s report. The benchmark rate will rise from today’s 2 percent to 3.5 percent in six months, according to the median estimate of 41 traders in a biweekly central bank survey published today.

‘Dilemma’

“The dilemma isn’t whether the monetary policy rate should continue increasing or not, but at what rate,” De Gregorio told senators.

One-year interest-rate swap contracts rose 11 basis points, the most since July 21, to 3.77 percent. The two-year rate rose nine basis points to 4.18 percent. Chile’s peso, little changed today, has risen 10 percent this quarter, the best performer among 25 emerging-market currencies tracked by Bloomberg.

Chile’s economic growth exceeded economists’ forecasts in each of the four months from April through July. The economy grew an average of 6.7 percent in those four months and 4.5 percent in the first seven months of 2010, according to calculations by Bloomberg based on central bank data.

Chile’s recovery has helped close the gap between actual output and productive capacity, the bank said.

“Considering that to June internal activity and demand were faster than expected, it can’t be ruled out that gaps continue to close at a faster pace than the one contemplated in the base scenario,” policy makers said in the report.

Quake Rebuilding

The economy will continue to expand this year as earthquake rebuilding efforts boost construction growth, Juan Pablo Castro, an economist at Banco Santander SA in Santiago, said in a Sept. 6 note to investors.

The economy could grow 5.5 percent in 2010 as consumer demand and inventory replenishment continue to support internal demand, Aldo Lema and Cesar Guzman, economists at Inversiones Security in Santiago, wrote in a Sept. 6 note to clients.

Retail sales in Chile rose 19 percent in July from the previous year, 18 percent in June and 19 percent in May, according to data compiled by Bloomberg. Industrial production increased 3.3 percent in July, 2.9 percent in June and 4.2 percent in May.

“It also can’t be ruled out that a major part of this dynamism has been in response to merely transitory factors like those associated with the Feb. 27 earthquake,” the bank said in the report.

Mitigate Inflation

The rising peso may mitigate the inflationary effect of Chile’s expanding economy, De Gregorio said.

“Despite the faster closing of output gaps, total inflation will follow a similar path to that previously expected, but underlying inflation will be more limited,” he said. “That difference is principally due to one-off factors in some prices and the effect of lower imported inflationary pressures.”

Consumer prices unexpectedly fell in August from the previous month on lower transport and financial costs, the National Statistics Institute said in a report today. Prices declined 0.1 percent from July and grew 2.6 percent from the previous year, the institute said. The central bank targets inflation of 3 percent plus or minus a percentage point.

“This data does not change the direction of monetary policy or the expectations of vigorous growth with contained inflation that we presented in this report,” De Gregorio said.

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

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