Chile, Peru Raise Rates to Two-Year High to Tame Demand, Damp Inflation
Policy makers in Chile and Peru yesterday raised their benchmark lending rates to two-year highs on concern that domestic demand and rising global prices may cause inflation rates and expectations to spiral out of control.
Chile’s central bank raised its benchmark rate more than expected to 5 percent from 4.5 percent. Four of 18 economists surveyed by Bloomberg forecasted a half-point increase, while 14 predicted a 0.25-point increase. Peru’s seven-member board raised lending costs by a quarter-point to 4.25 percent, matching 13 of 15 forecasts in a Bloomberg survey.
Peru’s economy in 2011 will lead growth in South America by expanding 7.5 percent while Chile will post the third-fastest growth at 5.9 percent, the International Monetary Fund said in a May 3 report. Yesterday’s rate increases -- the fourth straight for Chile and fifth straight for Peru -- seek to head off any quickening in consumer prices as economists in both countries still see inflation ending 2011 above target.
“Both countries are classified as economies that are either overheating or very close to overheating,” Alfredo Coutino, Latin America director for Moody’s Analytics, said in a telephone interview from West Chester, Pennsylvania. “The main reason for central banks in both countries to continue to tighten monetary policy is because they want to fight demand pressure, which is pushing up inflation.”
‘Hawkish Side’
Chile’s central bank, led by its president, Jose De Gregorio, has raised the benchmark rate from 0.5 percent beginning last June, including three half-point increases over its last three meetings.
“By surprising the market on the hawkish side, they clearly have the advantage,” Marcelo Salomon, chief economist for Brazil at Barclays Plc in New York, said in an e-mailed research note. Barclays now sees a quarter-point increase in June and expects Chile’s central bank “to continue tightening if inflation and activity conditions demand such action.”
Chile’s economy expanded 5.2 percent last year and could grow as much as 6.5 percent in 2011, which would be its fastest annual growth in more than a decade, according to central bank forecasts.
Economic activity grew a faster-than-estimated 6.8 percent in January, 7.2 percent in February and 15.2 percent in March from the previous year, according to central bank data.
Inflation Threat
Chile’s economic expansion poses a threat to inflation, De Gregorio told senators in Santiago on April 4.
“It can’t be ruled out that activity and demand could evolve above expectations,” De Gregorio said in Santiago. That could create “higher-than-anticipated inflationary pressures.”
Chile’s peso weakened 0.3 percent to 467.56 per U.S dollar at 3:14 p.m. in New York, from 466.35 yesterday.
The Peruvian sol advanced 0.5 percent to 2.7609 per dollar from 2.7760 yesterday.
Peru’s government expects gross domestic product to rise 6.5 percent this year, less than its previous forecast of 7.5 percent, Finance Minister Ismael Benavides said May 3.
Peru’s GDP rose 8.5 percent in February from a year earlier, after surging 10 percent in January.
Peru’s central bank, led by bank President Julio Velarde, has raised its benchmark rate from 1.25 percent last May.
Delicate Balance
The bank in its statement repeated language from last month, saying their decisions at their upcoming meetings would depend on economic data.
“Unless core and inflation excluding food and fuels gets out of hand, the central bank should opt for keeping interest rate hikes at a quarter point,” Citigroup Global Markets Inc. Latin America economists Joaquin A. Cottani and Camilo Gonzalez said in a research note e-mailed to investors.
Monthly inflation in Chile slowed to 0.3 percent in April from 0.8 percent in March while the annual rate eased to 3.2 percent in April from 3.4 percent the previous month, the National Statistics Institute said in a report last week.
Food and beverage prices led the increase in annual inflation last month, while utility and transportation costs also contributed to rising prices, the institute said.
Annual inflation will rise to 3.9 percent in 12 months, easing to 3.5 percent in two years, according to the median estimate of 53 traders in a May 11 central bank survey. Chile’s central bank targets annual inflation of 3 percent, plus or minus 1 percentage point over a 24-month horizon.
“Excess demand in Chile is the highest in Latin America,” Coutino said in a telephone interview. “That excess demand is being accommodated in two ways: inflation and imports.”
‘Might Reaccelerate’
Food prices in Peru have risen more than expected in 2011, and the government will eventually have to raise gasoline prices that have been frozen since February to reflect higher crude oil prices, Hugo Perea, chief economist at BBVA Banco Continental in Lima, said in a telephone interview.
Consumer prices in Peru rose 3.34 percent in April from a year earlier and 0.68 percent from March, beating analysts’ estimates. Food prices jumped 1.2 percent and clothing costs climbed 1 percent during the month. Peru’s central bank targets annual inflation of 1 percent to 3 percent.
The price of some foods including fish and rice have fallen this month, suggesting the inflation rate in May should be slower than in previous months, said Adrian Armas, the Peruvian central bank’s research director, during a conference call with reporters from Lima today.
“Inflation in Peru might reaccelerate in coming months, particularly because the economy has been widening the excess demand,” Coutino said. “That is the most dangerous problem for an economy when it enters the overheating zone.”
Aside from economic growth, global food and energy prices are contributing to higher inflation rates and estimates in the two countries, Coutino said.
Bloomberg’s global commodity index, which calculates the mean of indexes including energy, grains, food, precious metals and livestock, has gained 2.8 percent so far this year.
West Texas Intermediate crude has risen 5.5 percent in the same period.
To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net John Quigley in Lima at jquigley8@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net
Rate this Page