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Chile May Raise Rate to 2.75%, Slowing Pace as Peso Rally Damps Inflation

Chile’s central bank may slow the pace of interest rate increases at its monthly meeting as the peso’s region-beating gains against the dollar keep a lid on consumer prices.

Policy makers led by bank President Jose De Gregorio will raise their benchmark interest rate by a quarter-point today to 2.75 percent from 2.5 percent after four straight half-point increases, according to 12 of 20 economists surveyed by Bloomberg. Eight analysts expect a half-point increase.

South America’s fifth-biggest economy may expand at the fastest pace this year since 2005, according to Finance Ministry projections, even as the annual inflation rate slows below the bank’s target of 2 percent to 4 percent, giving policy makers leeway to raise rates more slowly. Reducing the pace of increases also would do more to control the peso’s gains than buying dollars in the currency market, said Matias Madrid, chief economist at Banco Penta, said.

“Raising by a quarter point is a way to reduce pressure on the exchange rate and reduce pressure on the bank to intervene,” Madrid said in a telephone interview from Santiago. “Intervening at this point would have little impact because of high copper prices.”

In trading yesterday, the peso strengthened as much as 0.5 percent to 473.89 per dollar, its strongest level since May 2008. In the last 12 months, the peso has gained 15 percent, the best performance against the dollar among the 31 most-traded currencies tracked by Bloomberg worldwide.

Peso

Board members at their September meeting considered a quarter-point increase before voting unanimously to raise to 2.5 percent from 2 percent.

According to the median of 40 forecasts in a monthly central bank survey published yesterday, policy makers today will vote for a quarter-point increase to 2.75 percent.

At that level, Chile still would have the lowest benchmark rate of major Latin American economies. Peru’s central bank, which is tied with Colombia for having the region’s second- lowest rate, decided to pause at 3 percent on Oct. 7 in a bid to stem the sol’s growth.

Policy makers have discussed intervening to help control the peso, whose appreciation has been “fast” and “significant,” De Gregorio said Oct. 6 in a special session of Congress to discuss the exchange rate.

The bank last intervened in the currency market in 2008 when it bought dollars in $50 million daily tranches.

Gauging Equilibrium

Chile’s exchange rate has moved to the outer extremes of a range considered to be “in equilibrium,” a policy maker said at the bank’s September meeting, according to the meeting minutes.

“We expect the Board to show more concern about the Chilean peso, given its negative impact on import prices,” Cesar Perez, an economist at Celfin Capital SA, said in an Oct. 12 note to investors.

Consumer prices rose 1.9 percent in September from a year earlier, down from the 2.6 percent rise in August.

Annual inflation will reach 3.1 percent in December this year, according to the central bank’s survey of economists, down from 3.3 percent in last month’s survey.

Inflation, Growth,

The “relatively well-anchored” inflation rates give the central bank space to reduce the speed of rate increases, Alberto Ramos, an economist at Goldman Sachs Group Inc., said in a note to investors yesterday.

“The central bank does not need to front-load the rate normalization cycle excessively in order to gain/protect credibility and through it, prevent the unmooring of inflation expectations,” he said.

To be sure, the acceleration of growth in the $164 billion economy also argues for maintaining the pace of rate increases, said Aldo Lema and Cesar Guzman, economists at Inversiones Security in Santiago, said in an Oct. 12 report.

“As the economic boom intensifies, it seems difficult to justify not increasing the monetary policy rate quickly to neutral levels of 5.5 percent to 6 percent,” the economists wrote.

Chile’s economy expanded 6.5 percent in the second quarter and probably exceeded 7 percent growth in the three months through September, which would be the fastest pace of expansion since 2004, Finance Minister Felipe Larrain said in an Oct. 5 address before congress.

Finance Ministry estimates used to draw up the 2011 budget proposal put growth for 2010 and 2011 at 5.1 percent and 6.1 percent respectively.

The bank may also weigh the effect of this week’s rescue of 33 miners trapped for more than two months half a mile underground. The rescue could potentially impact consumer confidence and consumption, Banco Penta’s Madrid said.

“If this impacts consumer confidence, there’s no doubt it would impact the economy,” he said. “It’s difficult to say, however, whether this will have an impact.”

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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