Chile’s Finance Minister Felipe Larrain pledged to limit spending growth to contain price increases and borrowing costs after inflation expectations reached a 10-month high earlier this month.
Larrain said he wants government expenditure to grow at a slower pace than gross domestic product, which the government targets to expand an annual 6 percent over its four years in office ending 2014.
“With a more moderate expansion of public spending, I am going to control inflation and will contribute to a more competitive exchange rate and lower interest rates,” he said in an interview in New York City yesterday.
The minister said inflation will be within the central bank’s target band of 2 percent to 4 percent this year after it breached the upper limit in three of the past four months. That up-tick in inflation will prompt policy makers to raise borrowing costs this year for the first time since June 2011, according to traders polled April 10 by the central bank.
Chile’s two-year breakeven rate, a measure of average future inflation priced into the swaps market, retreated to 3.1 percent yesterday after surging to 3.56 percent on April 2, the highest since June. One-year break-even inflation dropped 12 basis points yesterday to 2.88 percent.
“Larrain’s comments are a clear signal that the government will try to control inflation,” Sebastian Ide, head of rates trading at Banco de Chile in Santiago, said yesterday.
Fiscal spending grew 3.2 percent last year, while gross domestic product expanded 6 percent. This year, the government estimates economic growth will slow to between 4 percent and 5 percent, while public expenditure is budgeted to increase 5.3 percent.
Even with limited spending growth last year, inflation reached 4.4 percent in December, its highest level since April 2009. It slowed to 3.8 percent in March.
The central bank has kept its benchmark interest rate unchanged at 5 percent at its last three meetings following a surprise reduction in January.
The government announced this week a transportation fare subsidy in Santiago that may help control inflation and is studying tax changes that may include a cut on stamp duty, or tax on loans. Power bills for Santiago customers are set to fall in April as distributor Chilectra SA applies lower node prices.
The price in pesos of a barrel of Brent crude oil has declined 6.1 percent since March 23, when it reached the highest since 2008.
Interest-rate swaps dropped to the lowest in a month yesterday after the central bank held borrowing costs steady this week and as European fiscal concern weighed on the price of copper, the nation’s biggest export.
“The international environment hasn’t been pro-growth or pro-inflation,” said Ide. “A few weeks ago the chance of a rate cut was zero and while it is small today, it’s not zero.”
The two-year swap rate fell seven basis points, or 0.07 percentage point, to 5.19 percent, the lowest level since March 13. The one-year rate fell six basis points to 5.17 percent.
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