Chile May Resume Tightening, Raise Rate to 3.5% on Inflation Expectations

Chile’s central bank will probably raise its benchmark interest rate today after pausing last month as accelerating economic growth has pushed inflation expectations to the upper limit of its target range.

Policy makers led by bank President Jose De Gregorio will raise the overnight rate by a quarter-point to 3.5 percent, according to 17 of 20 economists surveyed by Bloomberg. Three analysts expect the bank to keep the rate at 3.25 percent for the second straight month.

The central bank forecasts that South America’s fifth- biggest economy probably grew at the fastest pace since 2005 last year and may post its biggest expansion in more than a decade in 2011. At the same time, rising global food and energy prices have led economists surveyed monthly by the bank to forecast that annual inflation will 2011 at the highest level since mid-2009.

“We’re seeing a major increase in inflation expectations,” Rodrigo Aravena, chief economist at Banchile Inversiones, said in an interview from Santiago. “When inflation expectations rise as quickly as we’ve seen -- also including two-year inflation expectations -- the interest rate without a doubt has to increase.”

Economists in a February central bank survey estimated annual inflation would close 2011 at 4 percent, up from the forecast of 3.2 percent made in December. The bank will raise the overnight rate to about 4.5 percent by June as food and energy continue to pressure prices and inflation expectations, Aravena said.

Growth, Inflation

The economy probably grew 5.2 percent in 2010 and is on track to expand 6.5 percent in 2011, the central bank said in its latest monetary policy report, published Dec. 20.

Consumer prices rose 0.3 percent in January from a month earlier, the fastest pace in four months, and 2.7 percent from a year earlier, the National Statistics Institute reported Feb. 8. The bank targets annual inflation of 3 percent, plus or minus 1 percentage point over a two-year horizon.

One-year breakeven inflation, which reflects traders’ expectations of the average price rises over the next 12 months, rose 4.3 percent yesterday from 3.40 percent on Jan. 3, when the central bank announced plans to buy $12 billion in U.S. dollars to weaken the peso.

Two-year breakeven inflation increased to 4.04 percent yesterday from 3.66 on Jan. 5, when policy makers started buying dollars in $50-million daily tranches.

Target

Chile’s strengthening job market will continue to add pressure to inflation rates this year, Aravena said.

The unemployment rate has dropped from 8.6 percent in the three months through April last year to 7.1 percent through December.

The central bank’s dollar-buying program also has contributed to an increase in inflation expectations, Celfin Capital said in a Feb. 14 note e-mailed to investors. A weaker dollar increases the price of imports.

De Gregorio’s comments in Israel over the weekend that controlling inflation -- not managing the exchange rate -- is the central bank’s primary role raises the odds the central bank will raise interest rates today, Italo Lombardi, an economist at BNP Paribas SA, said in a Feb. 15 report.

“This central bank has inflation targets, not exchange rate targets,” Aravena said. “That has been made quite clear.”

Peso

Policy makers may pause at 3.25 percent today to support their dollar-purchasing program, which has not weakened the peso as expected, Jorge Selaive, chief economist at Banco de Credito e Inversiones, said in a Feb. 8 note to investors.

Raising rates would discourage foreign investors from betting in favor of Chile’s peso, he said.

Chile’s peso has appreciated 4.4 percent since the dollar- buying program started on Jan. 5 after falling 5.9 percent in the two days after the Jan. 3 announcement. The peso fell 0.3 percent yesterday to 474.05 per dollar from the Feb. 15 close of 472.55.

At their last meeting on Jan. 13, policy makers kept the rate at 3.25 percent on concern over currency appreciation, Benito Berber, senior Latin America strategist at Nomura Securities, said in a Feb. 15 presentation e-mailed to investors. The last time the bank bought dollars to weaken the peso in April 2008, it held rates unchanged for two months.

Central bankers know today’s interest rate is expansive and that the real rate, which is calculated by subtracting inflation from the nominal rate, is close to zero, Aravena said.

Policy makers said in a statement accompanying last month’s rate decision they would start raising rates again in coming months at a pace that depends on economic conditions.

At 3.25 percent, Chile has the second-lowest benchmark rate among major Latin American economies tracked by Bloomberg behind Colombia.

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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