Chile Raises Rate to 4.5% as Economic Growth Surges, Inflation Accelerates
Chilean policy makers raised the benchmark interest rate by a half-point for the second straight month today as economic growth accelerates and consumer prices threaten to exceed central bank targets this year.
The five-member policy board, led by bank President Jose De Gregorio, raised the overnight rate by a half-point to 4.5 percent, matching the forecast of 19 of 21 economists surveyed by Bloomberg. Two analysts forecast that the central bank would raise rates by a quarter-point to 4.25 percent. It was the tenth rate increase in 11 months for the South American country.
Chile hastened the pace of rate increases in March to contain the effect of energy price gains on inflation forecasts. Policy makers today sustained that tempo as inflation surpasses the mid-point of the bank’s target and the economy accelerates toward what could be its fastest annual pace in more than a decade.
“The evolution of inflation rates, while still in line with expectations, reflects some acceleration of prices in both global and core measures,” Alejandro Puente, an economist with Banco Bilbao Vizcaya Argentaria SA (BBVA), said in an interview from Santiago. “In addition to inflation, economic activity continues to exceed estimates.”
Consumer prices rose 0.8 percent in March from February, the fastest since September 2009, the National Statistics Institute said last week. Inflation excluding fuel and produce rose 0.4 percent in March from the previous month, the quickest rate of growth since September 2010, the institute said.
Inflation Target
Annual inflation will accelerate to 4.3 percent by the end of the year from 3.4 percent in March, the central bank said in its latest quarterly monetary policy report, published April 4. The central bank targets annual inflation of 3 percent, plus or minus 1 percentage point, over a two-year horizon.
Chile’s annual inflation rate will return to levels within the bank’s target range by the second quarter of next year before closing 2012 at 3 percent, De Gregorio told senators April 4.
“Inflation has matched expectations,” the central bank said in a statement accompanying today’s decision. “Increases in global raw material prices, particularly oil, keep short-term inflation expectations of the private sector elevated.”
Policy makers are concerned that higher oil prices could create inflationary pressures on other consumer goods, De Gregorio said. Chile imports 99 percent of its oil, whose price in the Brent futures market increased 5 percent in March to $117.36 a barrel.
‘Important Risks’
“We confront important risks,” De Gregorio told senators in reference to international price shocks. “Those shocks could spread from specific sectors to remaining prices in the economy. Preventing that spread today is the principal task of monetary policy.”
Policy makers will continue to remove the monetary stimulus at a pace that depends on economic conditions, the central bank said in today’s statement. Chile’s economic growth also could contribute to inflationary pressures if demand exceeds output capacity, De Gregorio told senators.
“Chile’s economic recovery has consolidated and output gaps are closed,” he said. “It can’t be ruled out that activity and demand will evolve above expectations, causing them to exceed normal levels of productive capacity use in the economy and, as a result, causing inflationary pressures.”
The economy will grow as much as 6.5 percent this year, which would be the fastest pace of annual expansion in more than 10 years, policy makers said in their policy report.
Economic activity grew a faster-than-estimated 6.8 percent in January from the previous year and 7.2 percent in February on gains in the retail industry.
10% Growth
The economy could have grown as much as 10 percent in the three months through March from the previous year, which would be the fastest pace of quarterly expansion in more than 15 years, De Gregorio said in an April 7 speech.
“Domestic activity, demand and employment data continue evolving dynamically,” the central bank said in today’s statement.
Chile’s unemployment rate has declined on economic growth, falling to 7.3 percent in the three months through February from 8.6 percent through April 2010, the institute said. Salaries in February increased 5.8 percent from the previous year, the institute said in an April 7 report.
“Gaps in the labor market have gotten tighter with a rapid gain in employment and an increase in salaries,” policy makers said in the April 4 policy report. “Labor market conditions will continue to support the growth of consumption in coming months.”
The peso gained 9.3 percent over the past year through yesterday, the most among major Latin American currencies tracked by Bloomberg after the Brazilian real.
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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