De Gregorio announced a $12 billion plan last month to buy dollars in a bid to weaken the peso and boost reserves. The program, coming at the same time as a rise in global commodity prices, has led to an increase in inflation expectations.
The central bank, which has raised its benchmark interest rate more than any other major institution tracked by Bloomberg in the past 12 months, held the rate unchanged at 3.25 percent last month. The median forecast of 13 economists in a Bloomberg survey is that it will be increased to 3.5 percent on Feb. 17.
The risk of high oil and food prices spreading to other products “has to be mitigated,” De Gregorio said. “This is most needed in economies like Chile, that are operating close to full capacity. Controlling inflation is the best contribution that monetary policy can do to ensure sustained economic progress.”
Chilean two-year breakeven inflation, a measure of traders’ expectations for the average annual inflation rate during the next 48 months, reached a two-year high of 4.31 percent on Feb. 7, according to data compiled by Bloomberg. The central bank targets inflation of 3 percent over a two-year horizon.
De Gregorio said buying dollars for reserves entails “significant costs” and measures to control the appreciation of emerging-market currencies would only work temporarily, according to slides from his presentation posted on the website of the Chilean central bank.
Long-term measures are needed to foster economic competitiveness as currencies rise, increasing the costs of exporting from emerging-market economies, he said. The peso capped a third straight weekly gain on Feb. 11 and has already recovered most of the ground it lost in the week after De Gregorio announced his dollar-buying plan.
“Although there is the possibility of capital controls, their long-term efficacy must be carefully evaluated,” he said.
The bank should leave its benchmark rate unchanged this month to avoid an influx of money into Chile, Guillermo Calvo, an economics professor at Columbia University in New York, told La Tercera newspaper in an interview published today. To raise the rate would be to commit hara-kiri, he is quoted telling the newspaper.
The bank should live with slightly higher inflation due to an increase in global food prices, he said. Raising rates and buying dollars to weaken the peso are two incompatible policies, he said.
Calvo was chief economist of the Inter-American Development Bank for five years until 2006. Former Chilean Finance Minister Andres Velasco was once his teaching assistant.
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