Chile Central Bank Slows Pace of Rate Increases as Peso Rally Mutes Prices

Chile’s central bank slowed the pace of overnight interest rate increases at its monthly meeting as the peso’s rally against the U.S. dollar reduces pressure on consumer prices.

The five-member policy board, led by bank President Jose De Gregorio, raised the benchmark rate to 2.75 percent from 2.5 percent today, matching the forecast of 14 economists surveyed by Bloomberg. Seven other analysts had predicted a fifth consecutive half-point increase.

Below-target inflation gives policy makers leeway to focus on restraining the appreciation of the region-beating peso through a slower increase to borrowing costs, said Alejandro Puente, an economist at Banco Bilbao Vizcaya Argentaria SA. The currency’s gains reduce the cost of imports, he said.

“That implies less inflation and makes a rapid increase in interest rates less indispensible,” Puente said in a telephone interview from Santiago.

The peso has gained 15 percent against the dollar in the past 12 months, the best performance among the 31 most-traded currencies tracked by Bloomberg. After reaching 473.89 per dollar yesterday, its strongest level since May 2008, it closed at 478.95 today.

“The peso has continued to appreciate against the dollar,” the central bank said in a statement accompanying today’s decision. “Inflation has evolved somewhat below expectations.”

Peso Appreciation

A stronger peso can mitigate the pace at which the central bank increases interest rates, De Gregorio said in a Sept. 12 interview.

“If the appreciation proves more persistent, it would reduce some pressures on interest rates,” he said. “There are other developments -- the strength of the economy -- pushing us in the other direction.”

Consumer prices rose 1.9 percent in September from the previous year, down from an annual rate of 2.6 percent in August, the National Statistics Institute said Oct. 8. The central bank targets annual inflation of 3 percent.

Chile’s economy grew 6.5 percent in second quarter from a year earlier and likely exceeded 7 percent growth in the third quarter, which would be the fastest expansion since 2004, Finance Minister Felipe Larrain said in an Oct. 5 speech to Congress.

Policy makers estimate that the economy will grow 5 percent to 5.5 percent this year and as much as 6.5 percent in 2011, according to a quarterly monetary report published Sept. 8.

‘Robust’ Growth

“Data on activity show robust economic growth,” policy makers said in today’s statement.

Industrial production rose 6.9 percent in August, the most in more than four years as factories reopened after February’s 8.8-magnitude earthquake.

“Industries most affected by the earthquake are returning to normal,” said Matias Madrid, chief economist at Banco Penta.

The closure of the gap between actual economic output and potential will start to put pressure on inflation rates early next year, Florencia Vazquez, an economist at BNP Paribas, said in an Oct. 8 report.

“Near term, the Chilean peso strength will likely keep tradable price pressures contained, but the lift from the output gap will ultimately prevail,” she said.

Chile’s policy makers also have to consider that other central banks are holding interest rates or reducing the pace of increases, Puente said.

Pace of Increases

“That gives the bank more space to hold back on its pace of rate increases,” Puente said.

Among major Latin American economies, Chile has the lowest overnight rate, followed by Colombia and Peru. Peru on Oct. 7 decided to pause in an effort to stem gains in its currency, the sol.

Chile’s central bank will raise rates by a quarter-point at each of its next two meetings, according to the median estimate of 40 economists in a central bank survey published yesterday.

“The Board will continue to reduce the current monetary stimulus at a rate that will depend on the evolution of internal and external macroeconomic conditions,” policy makers said in today’s statement.

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

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