Chilean Monthly Inflation Slows to 0.2% in February, Matching Estimates

Chile’s consumer prices increased 0.2 percent in February from the previous month, matching the median forecast of 18 economists surveyed by Bloomberg.

Prices excluding fresh food and fuel rose 0.2 percent while annual inflation was unchanged from a month earlier at 2.7 percent, the National Statistics Institute said today. Core and annual inflation were also in line with analysts’ forecasts.

Chilean inflation expectations had soared this year after the central bank started buying dollars to weaken the peso, which makes imports more expensive, and the price of oil, Chile’s biggest import, climbed to two-year highs. Rising expectations have cemented forecasts of central bank interest- rate rises.

“February is typically a month with very low or even negative inflation and we already have 0.5 percent accumulated in the year,” said Rodrigo Aravena, chief economist at Banchile Inversiones in Santiago. “And even though the headline inflation wasn’t high, costs are rising fast. The most likely result is that the bank raises by 25 basis points, but the discussion isn’t going to be whether to raise or hold, but whether to raise by 25 or 50 basis points.”

The central bank yesterday reported economic growth for January that beat estimates, which may lead it to consider a 50 basis point rise, Alberto Ramos, a New York-based economist at Goldman Sachs Group Inc., said in a client note. Policymakers may favor a 25-basis point increase amid “mild” inflation and an appreciating currency, he wrote.

Monthly Inflation Slows

Monthly inflation was 0.3 percent in January and 0.1 percent in December, while the annual rate slowed to 2.7 percent in January from 3 percent in the previous month.

Chile has tools to deal with spikes in fuel prices, Finance Minister Felipe Larrain told reporters today in Santiago. While February’s data show the economy growing as inflation remains under control, the government will remain vigilant as international price pressure persists, he said.

One-year breakeven inflation, which reflects traders’ expectations of average price rises over the next 12 months, is up 111 basis points this year to 4.63 percent while two-year breakeven increased to 4.46 percent from 3.54 percent. Chile’s central bank targets annual inflation of 3 percent plus or minus 1 percentage point over a two-year horizon.

Flattening Yield Curve

Investors can brace themselves for interest-rate rises causing Chile’s yield curve to flatten by buying long-dated debt in pesos and short-dated debt denominated in unidades de fomento, an inflation-linked accounting unit, Aravena said.

“Long-term peso yields are attractive,” he said. “It is difficult for them to keep rising.”

Banco Security recommends bond investors shift 100 percent of their portfolios into inflation-linked securities, it said in a note to clients.

Chile’s peso, the best-performing Latin American currency tracked by Bloomberg in the past month, weakened 0.3 percent to 475.45 per U.S. dollar at 8:58 a.m. New York time, from 473.85 yesterday.

Copper, Chile’s biggest export, declined on concern that high oil prices may slow economic growth. A pound of the metal for May delivery slid as much as 1.7 percent to $4.254 on the Comex in New York.

To contact the reporters on this story: Randy Woods in Santiago at rwoods13@bloomberg.net or Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net

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