Chile Peso Gains Reflect Fundamentals as Economy Expands, De Gregorio Says

Chile central bank President Jose De Gregorio said the peso’s region-beating gain is in line with fundamentals and reflects the country’s economic strength.

The currency hasn’t “overshot” after strengthening 8.6 percent in the past three months, the biggest advance among major Latin American currencies, De Gregorio said yesterday during an interview in Basel, Switzerland.

There’s no need for policy makers to intervene in the currency market at this point, De Gregorio said. The peso has gained on the back of the strongest economic growth in five years, an increase in the price of copper, the country’s biggest export, and as the country recovers from a deadly February earthquake that did as much as $30 billion in damage.

“Markets overreact in the very short term, but we don’t see any significant misalignment,” said De Gregorio, 51. “Interventions are effective when there is misalignment.”

Chile’s economy is experiencing “balanced” growth that is based on consumption, investment and some transitory effects from rebuilding related to the temblor and ensuing tsunami, which killed more than 500 people and destroyed a swathe of the country responsible for 17 percent of Chile’s gross domestic product, De Gregorio said yesterday. Chile’s economy grew 6.5 percent in the second quarter and a faster-than-forecast 7.1 percent in July.

Chile’s boom is “totally contrary to what’s going on in industrial countries,” De Gregorio said.

The peso gained 0.4 percent today, closing at 494.90 per dollar, its strongest close since Jan. 19.

Neutral Rate

Advanced economies may see their economic growth rate slow in coming years, which could push down the lending rate at which monetary policy will neither stimulate nor constrict growth in those countries, De Gregorio said.

“How this feeds into our discussions and our views on inflation and monetary policy may become more relevant as we get closer to a neutral rate in Chile,” he said. “There’s a lot of uncertainty in the world about the neutral rate.”

Central bank models consider 5 percent to 6 percent to be a neutral interest rate for Chile, he said. Such a rate would maintain growth at sustainable levels while preventing inflation from exceeding the central bank’s target of 3 percent. Consumer prices climbed 2.6 percent in August from a year earlier.

The central bank reduced Chile’s benchmark rate to a record low 0.5 percent in July 2009 when the country was suffering from its worst recession in a decade. Policy makers started raising the rate in June this year and followed with two more increases, putting borrowing costs at 2 percent now.

Rate Outlook

Chilean economists and traders expect the central bank to raise the benchmark rate by half a percentage point for the fourth straight month this week, according to central bank surveys. Economists in the Sept. 10 survey expect the rate to reach 3.5 percent in December and 5.5 percent in February 2012.

Policy makers may have less impetus to raise rates if Chile’s peso continues to gain, De Gregorio said yesterday. A stronger currency makes imports less expensive in peso terms, helping mute gains in consumer prices.

“If the appreciation proves more persistent, it would reduce some pressure on interest rates,” he said. “There are other developments -- the strength of the economy -- pushing us in the other direction. The closure of the output gap has been much faster than expected.”

The output gap is the difference between actual and potential production in the economy. Inflationary pressures increase as the gap narrows.

The peso closed at 496.95 on Sept. 10. Finance Minister Felipe Larrain said in a radio interview last month the government was concerned about the peso’s rise, adding that central bank intervention was “undoubtedly a possibility.” De Gregorio, in a later speech, highlighted the importance of the central bank’s autonomy from the government.

Impact on Exporters

Flexible exchange rates have been critical to the ability of emerging markets to survive the economic crisis, De Gregorio said yesterday. Still, a rising currency isn’t good for exporters, who increasingly are hedging their currency risks.

“Chile needs to do more to help more exporters hedge their currency risk,” De Gregorio said. “Exchange rates are much more volatile and that’s costly, but flexible exchange rates have enormous benefits.”

Chile’s central bank raised its growth and inflation forecasts for 2010 in a quarterly monetary policy report Sept. 8. Policy makers increased this year’s growth forecast to a range of 5 percent to 5.5 percent from the previous forecast of 4 percent to 5 percent in the report published June 16.

“The Chilean economy is in good position to continue with a sustained rhythm of growth,” De Gregorio said in a Sept. 8 speech to the Senate.

U.S. Education

De Gregorio earned his doctorate in economics at the Massachusetts Institute of Technology, where he studied under Rudiger Dornbusch, U.S. Federal Reserve Chairman Ben Bernanke and Nobel Prize winner Paul Krugman. He worked at the International Monetary Fund from 1990 to 1994.

De Gregorio joined the central bank’s monetary council in 2001 after serving as Chile’s Minister of Mining, Energy and Economics for a year through June 2001. He has been president of the central bank since December 2007.

A distance runner and soccer fan, De Gregorio has taught economics at M.I.T. and the University of California, Los Angeles in the U.S. and Chile’s Pontificia Universidad Catolica de Chile and Universidad de Chile.

To contact the reporters on this story: Randy Woods in Santiago at rwoods13@bloomberg.net; Klaus Wille in Basel at kwille@bloomberg.net

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